Advantages and Disadvantages of Owning Real Estate
Real Estate is truly the Ideal investment. If you own stocks in the stock market, you are looking for price appreciation for holding the stock for a period of time, and some of the less volatile stocks offer a dividend, paid quarterly. Bonds, on the other hand will pay out an income yield based on the interest rate paid by the bonds. Investing in real estate, there are several ways in which to realize a great return on your investment. The advantages of owning real estate over time outweigh the disadvantages, some of the advantages and disadvantages are discussed below.
Advantages
Income
If you have purchased properly you can derive monthly cash flow or income. Over time rents will rise and your cost basis with will increase at a slower rate. This will result in more cash in your pocket.
Depreciation
This is a big tax advantage of owning real estate. The IRS considers the property as a depreciating asset (i.e. the building) and this can be expensed against any income generated by the property.
Equity
Over time the mortgage being paid by the tenants will reduce the principal balance. The equity built up over time will be realized once the property is sold. It can also be realized through refinancing.
Appreciation
Real estate will appreciate over time. This means your property will increase in value over time, patience is the key. The appreciation can be realized upon sale or through refinancing.
Leverage
This is a concept where a small amount of money can control a large asset. The benefit of leverage is the smaller the down payment the larger the percentage return on your money based on the appreciation. Example: $10,000 invested in a $100,000 property with a 5% appreciation equals a 50% return. $100,000 invested in a $100,000 property with a 5% appreciation equals a 5% return.
Low Volatility
Your property value can go up and down but you will not see the wild swings like you do in the stock market. Even if the property value drops you are still receiving income so you will be less likely to panic.
Disadvantages
Illiquid
Unlike stocks which are very liquid and can be sold anytime the market is open. Real estate can’t be easily liquidated, you will either have to sell it yourself, or list with a realtor using a Multiple Listing Service or MLS service. This could take weeks to months to sell, in good times. A stock is just a piece of paper, but real estate is a neighborhood a community and has limited appeal based on location and price.
Active Management
Real estate requires active management, you will be involved in decision-making unless you turn over all management of the property to a property management company.