The Pros and Cons of Real Estate Investment
The Pros and Cons of Real Estate Investment
Many investors specialise in property investment to the point of having no other types of investments in their portfolios. This approach requires close attention to the unique nature of this investment. The other alternative is to use investment in land and property to supplement other investments that perform differently when the economy changes.
Advantages
Portfolio Diversification
Specialist investors can use different types of real estate to diversify their portfolios. Examples include:
o Long-term options, e.g. rental property
o Short term options, e.g. real estate trading
If you make use of other investment vehicles, it is possible to use real estate as an additional means to diversify your investment portfolio.
Offshore Investment Opportunities
Professional financial advisors, like the Partners at StoneHouse Capital, are aware of economic conditions that influence it's markets in different parts of the world. There may be unique characteristics in countries that can influence investment decisions, e.g. the UK, where population growth is putting pressure on governments to make land available for affordable housing. Thus investment in land which is to be rezoned for residential purposes may deliver lucrative yields.
Yield Enhancement and Risk Reduction
Depending on your risk tolerance and investment strategy you can use it to produce an income in addition to other investments you may have. In adding real estate as an additional investment, you can decide to maintain the same level of risk and increase the overall yields of your portfolio. Another alternative is to maintain the same level of yields at a lower level of risk.
Increased Control over the Value and Performance of a Property Investment
Due to the tangible nature of real estate, the value and performance of the asset can be influenced by an investor. Physical alterations to the property can improve its value as an investment. The performance of an asset can also be actively influenced, e.g. a landlord subdivides a property and builds an additional residence, thus enabling additional rental income. Sometimes both value and performance can be improved. Business property usually carries a higher value and revenue flow than residential real estate.
Hedge Against Inflation
There always seems to be a greater demand than supply of property. This tends to drive real estate values higher. Property leases often have inflation linked or pre-determined rental increase clauses. The result is that real estate income tends to increase faster in inflationary environments, allowing an investor to maintain its real returns.
Challenges and Disadvantages
In considering the challenges and disadvantages of real estate investment, the input of one of the Partners at StoneHouse Capital can be highly valuable. S/he can identify how conditions will apply in your specific case and set a strategy that will be of best benefit to you.
Costs
Other investment classes have fewer types of costs attached. In real estate investment three types of costs must be considered:
o Purchase costs: Legal and administration fees and other hidden costs can push the real price up.
o Sales costs: Marketing, advertising and sales commissions can cut into profits.
o Operating cost: Real estate assets require regular maintenance and administration.
Management is Required
Real estate does not take care of itself. Both day-to-day operation of the property and strategic management is required. Outsourcing these functions could be costly. If you do it yourself, it could be very time consuming.
Cyclical Nature of the Investment
Two cycles move independently although they are linked to each other. Firstly, the leasing market cycle is determined by the balance between the supply and demand of available rental space. High demand for space leads to rental increase. Secondly, the investment market is influenced by investors who have capital and owners who market their properties. Investors need to be aware of how their property investments will perform during these cycles.
Measurement of Performance and Risk
It is easier to measure risk and return in the stock market than in the real estate market. Comparing results of property market investments is difficult because there is a lack of reliable benchmarks.
On the whole, significant advantage can be derived from making these investments. Consulting a professional financial planner, such as one of the Partners at StoneHouse Capital, can help you to identify how real estate can best be used as an investment that will help you to achieve your financial goals.
Many investors specialise in property investment to the point of having no other types of investments in their portfolios. This approach requires close attention to the unique nature of this investment. The other alternative is to use investment in land and property to supplement other investments that perform differently when the economy changes.
Advantages
Portfolio Diversification
Specialist investors can use different types of real estate to diversify their portfolios. Examples include:
o Long-term options, e.g. rental property
o Short term options, e.g. real estate trading
If you make use of other investment vehicles, it is possible to use real estate as an additional means to diversify your investment portfolio.
Offshore Investment Opportunities
Professional financial advisors, like the Partners at StoneHouse Capital, are aware of economic conditions that influence it's markets in different parts of the world. There may be unique characteristics in countries that can influence investment decisions, e.g. the UK, where population growth is putting pressure on governments to make land available for affordable housing. Thus investment in land which is to be rezoned for residential purposes may deliver lucrative yields.
Yield Enhancement and Risk Reduction
Depending on your risk tolerance and investment strategy you can use it to produce an income in addition to other investments you may have. In adding real estate as an additional investment, you can decide to maintain the same level of risk and increase the overall yields of your portfolio. Another alternative is to maintain the same level of yields at a lower level of risk.
Increased Control over the Value and Performance of a Property Investment
Due to the tangible nature of real estate, the value and performance of the asset can be influenced by an investor. Physical alterations to the property can improve its value as an investment. The performance of an asset can also be actively influenced, e.g. a landlord subdivides a property and builds an additional residence, thus enabling additional rental income. Sometimes both value and performance can be improved. Business property usually carries a higher value and revenue flow than residential real estate.
Hedge Against Inflation
There always seems to be a greater demand than supply of property. This tends to drive real estate values higher. Property leases often have inflation linked or pre-determined rental increase clauses. The result is that real estate income tends to increase faster in inflationary environments, allowing an investor to maintain its real returns.
Challenges and Disadvantages
In considering the challenges and disadvantages of real estate investment, the input of one of the Partners at StoneHouse Capital can be highly valuable. S/he can identify how conditions will apply in your specific case and set a strategy that will be of best benefit to you.
Costs
Other investment classes have fewer types of costs attached. In real estate investment three types of costs must be considered:
o Purchase costs: Legal and administration fees and other hidden costs can push the real price up.
o Sales costs: Marketing, advertising and sales commissions can cut into profits.
o Operating cost: Real estate assets require regular maintenance and administration.
Management is Required
Real estate does not take care of itself. Both day-to-day operation of the property and strategic management is required. Outsourcing these functions could be costly. If you do it yourself, it could be very time consuming.
Cyclical Nature of the Investment
Two cycles move independently although they are linked to each other. Firstly, the leasing market cycle is determined by the balance between the supply and demand of available rental space. High demand for space leads to rental increase. Secondly, the investment market is influenced by investors who have capital and owners who market their properties. Investors need to be aware of how their property investments will perform during these cycles.
Measurement of Performance and Risk
It is easier to measure risk and return in the stock market than in the real estate market. Comparing results of property market investments is difficult because there is a lack of reliable benchmarks.
On the whole, significant advantage can be derived from making these investments. Consulting a professional financial planner, such as one of the Partners at StoneHouse Capital, can help you to identify how real estate can best be used as an investment that will help you to achieve your financial goals.
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