Investing in property is one of the biggest decisions you will ever make as an adult, as property investments can be quite substantial. There are several advantages to investing in property and there are many risks too. The important thing is to maximize the benefits, while being aware of the benefits.
In this article we discuss both, the pros and cons of property investment and leave it for you to decide if this is something you should consider.
Pros and Cons of Property Investments
#1: Property investments are less volatile compared to an investment in the stock market – You won’t find the same sort of volatility in property investments that you find in other investments such as the stock market. The reason for this is that properties take a much longer time to dispose of – so people cannot get rid of a house at a moment’s notice, as many usually do with a stock that they fall out of love with.
#2: You can use the power of leverage to maximize your profits from property investments – You can buy stocks on leverage – in which case it is referred to “buying on the margin”. But you will only have access to a limited leverage when buying stocks, which has to be paid off within days or a few weeks. It is different with property investment. Here, you only have to make a small downpayment of around 10 to 15 percent and make up for the rest of the price of the property by taking a home loan from a bank, which can be paid over several years. Leverage allows you to maximize your profit from the investment and gives you the power to go for high value deals.
#3: You can earn an excellent passive income by renting out the property – You will start making money from your property investment almost immediately. When you buy a house, you can rent it out if that is not your primary residence. The rent pays for the mortgage and the expenses. You will also have enough money left over to ensure a positive cash flow. Renting out your property is an excellent source of passive income and can fund your lifestyle for years to come.
#4: Property investment is done with the long term perspective – The value of your property appreciates over time. With the population growth in countries such as Australia, United States and the UK being as high as they are, there’s a huge demand for residential properties, which are always in short supply. So property prices appreciate gradually over a period of time, without the sort of volatility as seen in the stock market. In addition to that, it generates a very good rental income for you through the years. This makes real estate an excellent long term investment.
#1: It is an illiquid investment – As said earlier, you cannot get rid of the property easily. It takes months to sell a property. So if you are in an urgent need of money for an emergency, you won’t get that from selling real estate.
#2: Real estate investments are expensive – Investing in properties requires a high entry cost. You can buy shares for as little as $10, but to invest in a property, you will need to put up at least $100,000 to $200,000, unless you buy it on leverage. Also, it is not always easy to get a home loan or a mortgage to buy a property. So there’s a big barrier to entry to overcome, at least when you are starting out.
#3: You are affected by external factors such as changes in the interest rates or slowdown in the economy – The value of your property will take a hit in the event of a nationwide recession and depends on local factors as well. Also, if interest rates are raised suddenly, paying the mortgage would become so much more expensive for you.
#4: There could be issues that you are not aware of – There are always some hidden problems related to a property. For example, there could be a problem with pests that wasn’t clear to you while making the purchase. Or there could be a problem with the water supply.
#5: Bad tenants – Renting out the property is a great way to earn a passive income, but only as long as you get good tenants. A property owner’s worst nightmare is to rent out the property to problematic tenants, who fail to pay on time, do substantial damage to the property and worse.
We have discussed the pros and cons on property investment. The pros largely outweigh the cons, but you should be aware of the risks at all times. After all, there is no other asset class that is as lucrative as real estate – it only takes one highly successful property investment to set you up for life.