Photo credit: William Cho
Real estate is property consisting of land or buildings. Real estate is divided into three broad categories – residential, commercial, and industrial.
For many people, real estate is the asset class they are most familiar with as virtually everyone is aware of the houses, condominiums, malls, shops, office buildings, factories, etc. we see in everyday life. Likewise, many people invest in real estate when they buy their first home.
- Stable returns. Real estate prices worldwide have generally trended upwards, giving investors decent, stable returns over the years (with the exception of housing busts). The US house price index has a 3.3% CAGR since 1991 and the Singapore property price index has a 4.0% CAGR since 1993.
- Less volatile than stock market. In general, prices in the real estate market fluctuate less and move slower compared to the stock market. This relative stability can be attractive to many investors.
- Generate rental income. Many investors look to invest in a property to collect rent and generate stable, passive income. In Singapore, overall rental yield has ranged from 3.5% to 4.9% since 2000.
- Utilize the benefits of leverage. In most cases, investors only need to put a 20% down payment to own a property with the rest financed by a mortgage. When used prudently, leverage can allow investors to achieve much higher investment returns.
- Easier to understand. While a lot of deliberation and analysis still goes into choosing the right property to invest, it is still easier to understand compared to stocks. Understanding a stock, how its business runs, and projecting its growth trajectory requires a lot more time and effort.
- Real estate is expensive. Compared to other asset classes, real estate is one of the most expensive assets you can invest in. While most people earn enough to own a home, buying a second investment property can be financially challenging.
- The dangers of leverage. While leverage can help boost your investment returns, it can also magnify your losses if prices fall significantly. You can also be hit with a margin call if your property is worth less what you owe the bank and face foreclosure If can’t service your loan.
- Non-liquidity. Real estate is the least liquid among the various asset classes. It may take weeks, months, or even years before you find a suitable buyer for your property. If you need to sell urgently, you might need to considerably lower your prices to attract a buyer quick.
- Hands-on management. Owning an investment property requires someone to handle the tenants, repairs, and upkeep & maintenance. Unless you can afford a property manager, you might need to be the one to do all this.
- High costs involved. Buying and maintaining a property incurs significant costs including property tax, stamp duties, maintenance fees, and agent commissions. Again, this inflates the cost of owning real estate.
Read the Full Series:
The Pros & Cons of Investing in Stocks
The Pros & Cons of Investing in Bonds
The Pros & Cons of Investing in the Money Market
The Pros & Cons of Investing in Real Estate
The Pros & Cons of Investing in Commodities