Advantages of Investing in Real Estate
Many people, when advocating an investment in real estate, point to the fact that ignoring the relatively small amount of reclamation that takes place, there is a fixed quantity of land available – in other words a limited supply.
There is also a growing population which increases the demand for Real Estate. As most everyone knows, where demand increases and the supply stays constant, prices will rise (all other things being equal).
An advantage of an investment in Real Estate is that in the past, it has acted as an excellent hedge against inflation i.e. prices have tended to keep abreast with inflation or at times exceed it. It should however be cautioned that there have also been periods in the recent past when prices have decreased! Nevertheless, over the long term, investors have generally profited.
Recent examples of capital appreciation in Real Estate are plentiful.
- In 2009, Home Construction Limited sold residential lots in the Crossings (Arima) at $66 p.s.f. Lots in the Crossings are now selling at $140 p.s.f. – an increase of over 100% in 6 years.
- In 2012, condominiums in the West Hills development in Petit Valley were presold (i.e. sold before being built) at $1,200,000 these units are now reselling at $1,800,000 – an increase of over 50% in 3 years.
Another often overlooked aspect is the “forced” savings that occurs through mortgage reduction. Assuming you buy a property for $1,000,000 using savings of $200,000 and mortgage financing of $800,000. At the end of the mortgage, even assuming the property had not increased in value which is unlikely, you would now have an asset of $1,000,000 vs. the $200,000 you previously had. While you would have paid interest on the mortgage, you would have had to pay rent had you not purchased the property.
You also have personal control over an investment in Real Estate unlike some other investments such as company shares. You can decide (on your own) whatever you deem necessary that would be in your best interest to enhance your return from the property. For example, cash flow from the property can form a major part of your returns. The cash flow is governed by the rents from the property, the expenses on the property and the mortgage payments. You may decide that it is necessary to increase rents, cut back on certain expenses or refinance the mortgage any of which could increase the cash flow to you.
Having shown some of the advantages of an investment in Real Estate, it needs to be pointed out that there are also some drawbacks. Some of these include:
- An investment in Real Estate normally requires a large outlay of money. While you can invest a small sum of money in shares of public companies or mutual funds, in most instances that is not the case in Real Estate. If you do not have the financial resources to raise a large sum of money, you will need to either go into partnership with other investors (and that comes with its own problems at times) or invest in a company or mutual fund whose primary focus is real estate.
- Unlike an investment in shares or government bonds, it is difficult to liquidate a real estate investment quickly should an unexpected, financial emergency arise.
- There is no guarantee that you will get back all the money that you have put into a real estate investment far less make a profit.
- When you invest in shares of government bonds, you periodically get a cheque in the mail (or a deposit is made to your account) and the investment requires little or no oversight. Not so with most investments in Real Estate which require considerable supervision although this can be reduced if a professional manager is hired.
Despite the last few points, it is still felt that careful investing in Real Estate will prove profitable in the long run. As mentioned at the beginning, all investing requires careful planning and analysis and the advice of a suitably qualified professional should be obtained.
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