Investing in real estate assets has always been considered a steady investment with little volatility. However, this safe investment mantra was challenged after the 2008 crisis, where that famous myth of "real estate never goes down in price" came face to face with the reality of the market. If the property bubble has taught us anything, it is that past returns are not guaranteed and no asset in the market is risk free. Today there is more awareness that investing in real estate is a good complement to reduce the volatility of an investment portfolio, by increasing its lack of correlation with other financial assets. Nevertheless, like everything, it has its pros and cons.
When thinking about whether or not to invest in housing, it is important to know two fundamental things: we must separate the purchase of a main residence from the one we do in order to obtain a rental income, and there are other options on the market if we want to direct our investment towards the real estate world.
In this and following posts we will review the pros and cons of buying the asset directly, as well as some of the best alternatives to invest in the sector without the need to have such a high outlay. It should not be forgotten that each investor profile is different and that it is best to have a financial advisor to guide us according to our needs by analysing the overall portfolio.
What pros and cons do we have when buying a property to rent?
The main advantages come from the return, since, if we analyse the historical behaviour of returns, real estate investment is above investment in equities in terms of risk and return. Another advantage that directly investing housing offers is that it is a tangible or physical asset, which provides emotional security to the investor in times of panic in the markets. The fact you have a physical asset generates more peace of mind than if it is papers or book entries. Lastly, investing in housing, as it involves a high amount, is normally accompanied by financing, so that profitability ratios are maximised due to the effect of financial leverage.
In terms of disadvantages, we could highlight the lack of liquidity, since if we need to immediately have the money from a divestment, we will depend on an unorganised market where the search for a buyer for our asset requires time and negotiation, and the differences between value and price tend to be an obstacle in negotiation.
Another drawback is the low level of diversification that it allows, since, by investing a high amount in a single property, it can be an option that is too risky as we are gambling everything on one card. As the market is not very homogeneous, depending on the area, orientation, height, associated services, etc., we will obtain a greater or lesser return. Therefore, if the wrong choice is made and we concentrate the investment in a single asset, there is little chance of recovering it and making it profitable.
Last but not least, direct investment requires periodic reinvestment, high maintenance costs and associated expenses. In addition, a heavy burden of taxes and repairs if damage occurs, since the owner will be forced to reinvest in the property from time to time to keep it in perfect condition and later be able to transfer it in good condition.
Fortunately, we have alternatives to invest in the real estate sector without having to buy a property directly and stake our luck on a certain type of asset. But we will look into that in later posts…