Knowing the benefits and drawbacks of any real estate investment is crucial before making a decision.
Real estate investing is a favorite among experts. Yet why?
What do they understand about real estate investing that we presumably do not?
Each investing choice offers a unique mix of benefits and drawbacks. Understanding this is crucial for figuring out how much of oneself to expose to each investment.
The amount of real estate investing that professionals are exposed to varies.
Real estate investments are typically limited to 10% to 70% of a typical investor’s portfolio.
So how do we determine whether to expose ourselves to 10%, 70%, or something in between?
If we are aware of the benefits and drawbacks of real estate investing, this awareness will develop.
- Long-term real estate investing offers several benefits.
- Expecting substantial profits from real estate over the long term is reasonable.
- Even real estate has its control points, just as other investments.
- Real estate investments follow a straightforward investing philosophy.
- Purchase a property that generates respectable profits.
- How can I make sure the real estate investment will be profitable?
- Real estate investing depends on being able to recognize quality assets. Real estate investments may offer the highest profits with the lowest risk if they are made appropriately.
- On the other hand, poor real estate can seriously drain your bank account.
- Knowing the benefits and drawbacks of real estate investing is crucial for investors. Typically, people invest in real estate to purchase properties for their use.
- Since there is no selling pressure to book profits in this situation, the risks are modest.
- However, real estate investors who purchase homes to profit must exercise caution.
- Knowing the advantages and disadvantages of investing in the real estate business is crucial for these investors.
What are the benefits of investing in real estate?
We are all aware that investing in real estate may be profitable.
It is one of these investment choices that can produce the most reliable source of passive income.
People like myself, who want to retire early, can’t pass up this investment opportunity.
But real estate also has certain additional characteristics that make it my favorite:
What innate qualities am I referring to?
- Before buying, I can feel, touch, and view it.
- You might be able to create a custom specification and locate a suitable home.
- It may practically assure rental revenue even before it is purchased.
- The value of the real estate will rise over time.
Here are a few more significant benefits of a real estate investment property:
Enables asset diversification
- Real estate seldom ever has a direct relationship to other well-known paper-based assets, such as equity, debt, etc.
- In actuality, it has a bad association with things like equities, gold, and so on.
- This indicates that asset diversification is the first benefit that real estate offers.
- The increase in value of a real estate portfolio is not significantly correlated with that of other asset types.
- Real estate frequently performs well when the stock market is performing poorly.
- Real estate would still provide strong profits when an economic boom was coming to an end.
Immediate Dual Income
- Similar to equities, real estate offers the potential for two streams of income.
- Dividends from stocks give short-term revenue.
- Short-term rental revenue is provided by real estate.
- However, rental income has a much longer history of dependability than dividend income.
- Long-term capital growth is offered by both equities and real estate.
- Stocks may increase more quickly.
- Long term, real estate offers slower but steady capital growth.
Excellent Inflation Hedging
- Rent income and value growth outperform inflation without a doubt.
- Real estate property is the only investment that constantly outperforms inflation.
- To think of real estate as an only inflation hedge is unfair.
- Real estate investment returns may often outpace inflation if properly managed.
Reduces income taxes
- Tax advantages may be claimed if real estate is invested in while taking out a mortgage.
- There are the following tax incentives available for first homes that are self-occupied:
- Tax Break U/S 80C (principal component-Max 1.5 lakhs).
- Tax deductions are allowed for interest paid on mortgages under Section 24. (Max 2.0 Lakhs).
- Benefit U/S 80C is not available for second homes.
- However, the entire interest component is deductible from income.
- If the interest component is $3,000, the entire $3,000 is eligible for a deduction under Section 24. However, it will be assumed that the second home has been “deemed rented out”.
Leverage use in real estate investing might elicit conflicting responses.
It has both benefits and drawbacks.
Case 1: Let’s say you spent Rs. 50 lakhs on a home. Only 10%, or Rs. 10 lakhs, of the total sum of Rs. 50 lakh, was paid by you.
- A home loan was used to pay the remaining Rs. 40 lakhs (EMI Rs 40K per month).
- Let’s say the property’s worth increases by Rs 55 lakhs (10%) in a year.
What will you earn from this?
- Profit is expected to be about Rs. 5,00,000 – 40,00012 (EMI) + 60,000 (Principal paid) = Rs. 80,000. (profit).
Case 2: Consider choosing to buy a house within your means rather than paying Rs 50 lakhs for it.
- As a result, you spent Rs. 10 lakhs for a property.
- Let’s say the property’s worth increases by Rs 11 lakhs (10%) in a year.
What will you earn from this?
Profit will be roughly Rs. 1,000,000 – 10,00012 (EMI) + Rs. 15,000. (loss).
- The advantage of applying leverage is this.
- Properties that cost more tend to appreciate more quickly.
- Consequently offers you a benefit when applying pricing leverage.
Real estate investment drawbacks
Apart from other drawbacks, the restriction of being so “price intensive” is the most obvious.
A typical investor can purchase stocks with merely Rs. 500 on one hand.
Nevertheless, even Rs. 5,000 may not be enough to invest in real estate.
Real estate property is also difficult to acquire and sell because it is an immobile asset. How?
Finding a house in your ideal location is difficult. Finding purchasers in the area where the property is located might not be simple.
In addition to this, the following are a few significant drawbacks of investing in real estate property:
There is a capital gains tax to pay.
- If a property is sold for more money, capital gains tax is due.
- Short-term capital gains tax, according to one’s income bracket, will be applied when a property is sold within three years after acquisition.
- But a flat 20% long-term capital gain tax is imposed when real estate is sold more than three years after the original acquisition (after indexation).
- High capital requirements are one of real estate investing’s main drawbacks.
- It takes a lot of time and money to acquire and sell a property because of the high capital requirements.
- This is one of the main explanations why so many individuals use loans to purchase real estate.
- These practically all-alternate service class individuals are burdened by housing loans. Living on borrowed money for a third of your life is frequently a burden.
- And why is this taking place?
- as everyone wants to purchase a property for themselves. Consequently, the cost of real estate is very high.
High Cost of Maintenance
- Compared to other assets, real estate has higher management costs.
- In addition to maintaining the property’s interior, the owner is responsible for paying the society’s maintenance fees.
- As a result, real estate becomes more expensive.
Additional drawbacks of real estate investing
- Property that is real estate is highly illiquid. A sizable chunk of money is locked and is difficult to recover.
- Finding acceptable tenants again and time again is difficult if you want to continue receiving rental revenue.
- When the market isn’t doing well, real estate property prices may likewise decrease (temporarily).