Real estate is considered as an alternative investment. It fits as part of the portfolio as it can be used to enhance the returns of a larger portfolio or it also works in reducing the risk of the current portfolio as well.
Positives of investing in real estate
- a) The portfolio is diversified and the assets as well allocated. Real estate is also easily understood by all as compared to stocks and shares.
- b) It allows you to achieve better returns on your portfolio while decreasing the risks associated with it.
- c) The property can be converted to rental units and act as a steady income stream. This rental income can be converted to your retirement fund as well. The additional income which is received gives the owner more access to credit. Lending institutions lend to people who earn more and therefore this opens more doors for credit lending.
- d) Rental income increases faster when there is inflation and therefore the investor is able to maintain the real returns of their investment.
- e) It offers investors security as the value does not fluctuate much as compared to stocks and bonds.
- f) The investor can utilize the property and thus decrease the cost of their outflow every month as they do not need to pay for rental premises. It can also be willed to family members thus the investor can leave a legacy behind.
- g) Based on the tax laws, the investor can get respite from some tax amount based on the jurisdiction as well as the rules.
- h) It is tangible and the investor can increase the value and performance by various means. Also the owner can resell the property for a much higher price than when he bought it.
Negatives of investing in real estate
- a) You incur considerable cost as compared to other investment classes.
- b) It is costly to operate as it requires maintenance. Repairs to the HVAC, roof and major repairs are very costly and if it is not done in reasonable time, the local authorities may slap fines on the owner. The property taxes too are extremely high. These taxes vary as per the state and city.
- c) It requires management to deal with day to day operations as well as strategic management in terms of the market position of your investment. Incase the property is rented to unknown tenants, there is a risk of renting to people who will not take care of the property and additional sums will be required to repair the property.
- d) It is difficult to acquire and for diverse portfolio, you need to make purchases in various geographical locations
- e) It is dictated by demand for space. If there is scarcity of space, the market rent increase. However, once the rent has reached economic levels, the developers construct in additional spaces so supply meets the demand.
- f) If the supply of capital which seeks investments in real estate is plentiful the prices of property increases.
- g) It is difficult to compare the results of the portfolio and difficult to measure risks and returns.
- h) Investing in real estate could be confusing due to the laws that are enforced or the land ceilings. This is even more complicated if the investor has commercial real estate
- i) As an owner of property, you may be liable if something from your property falls and injures someone. Not only is the owner liable for medical care but also for personal injury lawsuits as well as attorney fees.
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