With rising housing prices, real estate investment has become increasingly popular. However, there are both advantages and disadvantages to purchasing property as an investment. On the positive side, real estate can generate rental income and benefit from appreciation over time. But there are also risks like changing market conditions, high transaction costs, and illiquidity to consider. Striking the right balance is key to succeed with real estate investment.
Real estate investment can bring stable cash flows
One major benefit of owning rental properties is that they can generate relatively stable rental income. As long as there are tenants renting the property, positive cash flows are possible on a monthly basis. This provides investors with steady passive income separate from stocks and bonds.
Property values usually increase over the long run
Historically, real estate values have trended upwards over decades. As land becomes scarcer and demand rises with population growth, property appreciation beats inflation more often than not. Patient investors can realize sizable capital gains when selling, using real estate as an inflation hedge.
Leverage magnifies returns with mortgages
Unlike buying stocks outright, investors can use mortgage financing to purchase property. This allows gaining exposure with less capital upfront. If housing prices rise faster than interest costs, the leveraged returns boost investor performance.
Illiquidity makes exiting difficult
Selling property isn’t as easy as trading equities or bonds on exchanges. Listing, showing, negotiating offers, and closing sales take significant time. If investors need money quickly, they can’t access funds locked in real estate right away.
Tenant and property management is demanding
Dealing with tenants, maintenance issues, taxes, insurance, and other aspects of operating rental properties leads to headaches. Investors must put in effort and expense to keep properties occupied and in good shape.
Transaction costs and fees are high
Between Realtor commissions, moving costs, property taxes, attorney fees and more, buying and selling houses costs thousands of dollars. These expenses take a big cut from returns and make frequently trading impractical.
Real estate investment delivers diversification but requires research and work. Understanding the pros of income generation and price appreciation as well as downsides like illiquidity is key to succeed.