May 30, 2008

Basic Pros and Cons of investing in real estate

I'm a fan of real estate investment in general. However I recognize that it has a lot of down sides along with the benefits. In general the primary pros and cons of rental real estate investments as I see them are below.


Good potential return. Real estate gives you returns via property value appreciation, rental receipts and these can give a significant return % rate especially if you're leveraging a loan.

Relatively low volatility. Property values do not fall or rise excessively fast compared to some other investments.

Tax benefits. You are able to deduct depreciation and expenses from your rentals. This can eliminate a substantial amount of your tax burden.

Inflation protection. Rental receipts should increase over time along with inflation.

Simplicity. Buying a house and renting it out is a fairly straight forward investment vehicle and does not require advanced knowledge of the finances.

Steady demand. Its basically a recession proof investment. People will always need homes.


The work involved in being a landlord. No matter how you handle it there is work involved in managing an investment property. Whether you do the work yourself or if you hire a property manager, you have to expend some energy.

Not a short term investment. If you are going to invest in real estate then you really need to be in the investment for years. Real estate is definitely not a short term venture.

Extra liability. If anything goes wrong with the rental then you can be held liable.

Lack of diversification. With real estate your eggs are all in 1 or a few small baskets. If you have problems with these properties or the area they are in then the damage will impact your entire investment.

Poor liquidity. You can't sell a rental property with a click of a button. It might take months to have a property sell.

Lack of mobility. If you own a property then you can not easily pickup and move across the country and take the property with you. If you move you are either faced with managing a property long distance (not recommended) or selling the property prematurely.

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