Real estate is often considered one of the best investment options to gain high returns. However, just like other investment avenues, real estate investing also has its fair share of risks and challenges.
So, before you choose real estate investments, let us take a look at the major demerits of property investment and learn why real estate investment is not always a good choice.
Understanding Real Estate Investment
Real estate investment, as the name suggests, refers to property investment wherein you purchase properties with the expectation of generating income or profiting from appreciation over time. These include residential properties, commercial buildings, and land development. Investors around the world are attracted to real estate because it offers numerous benefits like:
There is no doubt that these benefits are appealing, but keep in mind that real estate investment also comes with several drawbacks and risks. Let’s explore some reasons why it might not always be a good choice.
Drawbacks of Real Estate Investments
High Initial Costs
One significant drawback of real estate investments is the high upfront costs. Purchasing property requires a substantial amount of capital and this can be a challenge for many investors who are just starting their investment journey. Moreover, there are down payments, closing costs, and property maintenance expenses that would quickly add up to the overall investment cost. Eventually, it would make it difficult for you to get started with real estate investing without a significant amount of savings.
Illiquidity
Illiquidity is high in this type of investment as real estate is not a liquid asset like stocks or bonds. This means it cannot be easily bought or sold. Selling a property can take months or even years, depending on market conditions and location. This lack of liquidity can be problematic, especially in times of financial need, when you may require emergency cash.
Property Management Challenges
You also need to provide enough time and finance for property management. Owning rental properties requires active management including finding tenants, collecting rent, handling maintenance and repairs, and dealing with legal and regulatory issues. Though you can always choose to hire property management companies to handle these tasks, it always comes at an additional cost, which can certainly eat into your profits.
Market Volatility
Be it any asset class, there are always market fluctuations which you cannot avoid, and real estate is no exception. There are economic downturns, changes in interest rates, and shifts in local market conditions that can all impact property values and rental income. While real estate value historically tends to increase over the long term, there are no guarantees.
Legal and Regulatory Risks
Yes, there are several legal and regulatory risks and this may include zoning laws, building codes, landlord-tenant regulations, and environmental regulations. Violating these laws can result in fines, lawsuits, or even forced property closures.
Conclusion
These are some of the reasons why real estate is not always the perfect choice for investors. While real estate investment can be an alluring wealth-building strategy, it does come with its share of pitfalls.
If you are looking for alternative investment options, you can also consider options like peer-to-peer or P2P lending. With P2P lending platforms like 13Karat, you can directly connect with borrowers and generate high returns of up to 13% per annum. Isn’t that a great way to earn a significant amount of money just by lending it? If yes, take a dive and download the 13karat mobile app right away.
