The Pros and Cons of Real Estate Investing (2024)

Real estate investing is a popular strategy for building wealth that involves purchasing, owning, and managing properties with the expectation of generating income or value appreciation over time.

Like any investment, it is not guaranteed to increase in value, and also has it’s own set of advantages and disadvantages.

Read below to find out what they are so you can make more informed decisions as to whether real estate investing is right for you.

Pros of Real Estate Investing:

Let’s get straight into it.

Here are some of the advantages to real estate investing:

1. Potential for High Returns: One of the primary attractions is its potential for high returns. Historically, real estate has shown steady appreciation in value over the long term, which in turn has provided significant capital gains. There is also the possibility to receive rental income from investment properties which can generate ongoing cash flow, thus further enhancing returns.
2. Compounding Returns with Leverage:The ability to borrow a significant percentage of an investment property’s purchase price can greatly increase total returns. For example, borrowing 75% with a real estate mortgage, secured on both the property and the rental income, would result in a 100% return on your invested capital after just a 25% increase in the property’s value (before applicable taxes).
3. Portfolio Diversification: Being separate from stocks and bonds, your investment portfolio can enhance its diversification with real estate. This is because real estate values often move independently of other assets, thereby helping to reduce overall portfolio risk and volatility.
4. Tax Advantages: Real estate investors often benefit from various tax incentives and deductions that can lower their overall tax liability. Expenses such as mortgage interest (excluding the UK), property taxes and insurance can often be deducted from rental income, reducing taxable income. Additionally, profits from the sale of investment properties may qualify for preferential capital gains tax treatment (excluding the UK), depending on the holding period or rules in your relevant jurisdiction.
5. Tangible Asset: Unlike stocks or bonds, which represent ownership or debt in a company, real estate is a tangible asset that you can see, touch, and control. Owning physical properties can provide a sense of security and control that can be appealing to those seeking more direct involvement in their investments. Along the same vein, real estate investments can offer the opportunity for hands-on management and improvement, allowing you to add value and increase returns.

Cons of Real Estate Investing:

We’re not here to waste time, here are the disadvantages!

1. Lack of Liquidity: One of the major drawbacks of real estate investing is its lack of liquidity compared to other asset classes. Unlike stocks or bonds, which can be bought and sold quickly, selling a property can be a time-consuming process that may take weeks, months, or even longer. Illiquidity can make it challenging for those wishing to access their capital quickly in times of need or take advantage of new investment opportunities.
2. High Upfront Costs: Real estate investments typically require a significant amount of capital upfront, including down payments, closing costs, and ongoing maintenance expenses. For many, this high barrier to entry can make real estate investing inaccessible or impractical. Financing real estate investments with mortgages can also introduce additional risks, such as interest rate fluctuations and leverage.
3. Risks From Leverage: Whilst borrowing to invest in property is often seen as a positive way of increasing returns, interest rate risks need to be managed carefully. The risk of interest costs exceeding rental income over time can be very real, especially during periods of rapidly rising interest rates. In such circ*mstances, exiting the investment may not be possible (see point 1 above) and so maintaining good cash reserves is vitally important.
4. Management and Maintenance: Owning and managing investment properties can be time-consuming and labour-intensive, requiring landlords to deal with tenant issues, property maintenance, and regulatory compliance. While hiring property management companies can alleviate some of these responsibilities, it comes with additional costs that can eat into overall returns. As well as this, vacancies, property damage, and unexpected repairs can negatively impact cash flow and profitability. Maybe not very ‘passive’ income after all..!
5. Market Risk: Real estate markets are subject to fluctuations and cycles, which can impact property values and rental demand. Economic downturns, changes in interest rates, and shifts in local market conditions can all affect the performance of real estate investments. You must carefully assess market risk and conduct thorough due diligence before committing capital to real estate to ensure you are making informed investment decisions.

Buy In or Steer Clear?

There are ways to invest in real estate without having to buy a property, such as through REITs, which can help with upfront and management costs, though the majority of the pros and cons remain the same.

It’s important to carefully weigh up these pros and cons when deciding whether real estate investing is right for you. How does it align with your overall financial goals, time horizon, risk tolerance and more?

Patterson Mills are here to help you answer these very questions (and more!) when it comes to considering real estate within your investment portfolio.

Get in touch with ustodayand book your initial, no-cost and no-obligation meeting.

For our Swiss, Australian, US or other readers outside of the UK, you can easily send us an e-mail to [email protected] or call us direct at +41 21 801 36 84 and we shall be pleased to assist you.

For our UK readers, you can easily send us an e-mail to [email protected] or call us direct at +44 1908 503 741 and we shall be pleased to assist you, too!

Please note that all content within this article has been prepared for information purposes only. This article does not constitute financial, legal or tax advice. Always ensure you speak to a regulated Financial Adviser before making any financial decisions.