Advantages And Disadvantages Of Investing in Real Estate: Real estate otherwise known as realty or real property simply refers to properties that cannot be easily moved, usually buildings and the land they are built on. Investment on the other hand implies placement of capital in expectation of deriving income or profit from its use or appreciation.
Real estate investment therefore is the placement of capital on real estates in expectation of deriving income or profit from its use or appreciation. The selling, leasing, mortgaging or transfer of land by whichever means, within the spirit of or in accordance with the customs of real estate investment, for the purpose of making profit qualifies as real estate business.
The real estate investment is a very flexible business venture, just like every other contractual engagement. It is flexible in the sense that you can do the investments and broker deals on your own terms. And also, there are many ways to invest in real estate. You can invest directly or indirectly. Investors can buy real properties below the market price and sell at a profitable price, or he they may choose to build from the scratch and sell upon completion. You can trade on lands and on buildings.
Asides the outright sale of properties, there are options to rent, lease for a term of years, purchase and sell by mortgage and so on. There are always available target customers with flexible demands in the real estate business. Real estate investment has grown to become one of the most lucrative enterprises to venture into. The enterprise is capable of yielding so much money within a short time. Of course, real estate investment is not without risks, but the risks are worth taking over time. Just like there are advantages and disadvantages in all sectors and practices.
Advantages (Merits) of Real Estate Investment
Investing in real estate has a number of advantages which renders the business worthwhile. The advantages include:
1. Ease of Understanding: Real estate investment is something that every curious and even uninterested person knows and understands what it is all about. The idea and the business practice is a general and understandable one. Although the venture has its peculiarity and technicalities, they are such that can be easily appreciated when one begins to plan a career in real estate investment.
It is all about profit making and avoidance of losses as much as possible while dealing on landed properties within the spirit or in accordance with the real estate investment practice. Having this idea alone in mind is a good start to drive you towards expectancies in the field. The concept of real estate investment is not abstract at all; rather, it is very much relatable. It is not a complex investment.
2. Flexibility in the real estate market: This too forms part of the flexible nature of real estate business. There are no regulations as to pricing or pricing formula in the real estate business. It is rather based on the property itself. The pricing of one real estate property does not in any way affect the other; no matter how closely related they are.
Even when the property is valued accordingly, the account of its value still does not affect the pricing, except to the extent that the geographical location of the property determines. This is because; real estate is focused on the future as opposed to the present or past. Investors are free to operate the business on their own terms and the circumstances available. This therefore contributes to the high profitability of real estate investment.
3. Steady inflow of cash: Real estate investment is such that guarantees steady inflow of cash and profit. Once one is established in the business and gives the business the financial responsibility that it demands, there would always be cash inflow. It is in real estate business that you see how money inflow is being rolled over and reinvested zealously. But of course, as a business person, one must separate his investment capital from the profits or be faced with difficulties in the business.
4. Purchase of real properties below the market price: As a real estate investor, you are mostly opportune to acquire real properties below the market price. This is because your prospective sellers know that you are buying for a future profit. So, it’s more like getting at a wholesale price, and the profit is usually massive because the property rather appreciates in value. Even when a real estate investor is bound by circumstances to purchase at a market price, he will still make his profit because the value of the property will appreciate in due course.
5. Real estate never depreciates in value: The value of real properties is steadily on the rise. That is why investors purchase real properties and wait for further years before they sell it strategically. A lot of factors contribute to the appreciable nature of real properties.
This includes development, inflation, economy adjustment, limited real estate, the necessity for landed property and so on. Real properties never depreciate; it may only take time to make the best profit.
6. Purchase on leverage: Real estate investment can be started and fostered with borrowed capital. This is usually done strategically to ensure that there are greater chances of profitability of the investment, to be used in clearing off the debt. You do not need your own savings to invest in real estate.
7. The use of receivables as collateral: Receivables in this context imply the money being expected in the future by investors. Real estate investment is the field where it is most practicable to use receivables to secure loans. The profits being expected upon a successful investment are receivables. An investor can use it as a security for loan.
Financial institutions are also most willing to give out loans to real estate investors using their receivables as collateral as long as the investing individuals or companies can be trusted. The institution giving the loan will have to examine the nature of the investment and the chances of its profitability before giving the loan.
8. Inflation advantage: Real estate investment is not affected by inflation. The pricing of real estate rises automatically as inflation rises.
Disadvantages (demerits) of Real Estate Investment
1. Exorbitant cost: The cost of starting and running real estate investment is very high. It is not a business for financially weak people. It is equally not a business that one can start with little funds and then grow bigger. The purchase of real estate properties costs much, and as an investor, you have to purchase in order to sell and make profit.
2. Illiquidity: Real properties are illiquid in the sense that they are not easily convertible to cash. It is not a regular and entirely indispensable commodity that has massive demand and supply. And even when there are demands, real properties are usually sold strategically in order to make profit.
They could be acquired and sold in many years later, so that the value will appreciate and profits be made. Therefore, investors may have to hold on to a property for a longer time before sale. The long wait before sale may operate to cause loss to the property or other possible risks?
3. Expenditure on management and improvement: As a realtor, while holding on to a property where situations demand, there is always need to maintain the property and keep it in shape, especially when it is a building. And it may warrant that non maintenance of the property will depreciate its value.
4. Risk of losses: Just like in every business, loss is very much anticipated. The anticipation of losses can be channeled to good use by taking the necessary steps to minimize losses. But then, losses are integral aspect of business. If they cannot be circumvented, they have to be accepted and be remedied in the future. In the case of real estate, it could be loss of profit, loss of property and so on. Losses are just inevitable.
5. Flexibility and inefficiency: The flexibilities and inefficiencies in real estate investment operate against the prospective buyers, particularly as to the exorbitant and sometimes unfair cost of purchase.
6. Cost of time: Real estate investment demands commitment and consumes time. It may equally take time to make profits, depending on the nature of the investment.
Real estate investment is a very profitable and recommendable business to venture into. It is certainly not without disadvantages, but its advantages undoubtedly outweighs.