subject: Three drawbacks of investing in real estate [print this page] Three drawbacks of investing in real estate
Real estate investing can be a powerful strategy to build wealth over time, but every investment has its drawbacks. Before you commit your time and money, you need to understand if this is the right kind of investment for you. Here are three drawbacks of investing in real estate.
Liquidity
Selling a real estate property is not like withdrawing money from the bank. It takes time and effort to sell property, which is why real estate is considered to have low liquidity. You can have some security in knowing that you have ownership of the property, but you may not be able to access this money very quickly should the need arise. Selling a stock, for example, is much easier and quicker than selling a house or apartment complex.
This is certainly a drawback in that your money will be committed for the long term, but you can also consider this a strength because real estate tends to perform well over several years. Those who invest in the stock market often miss out on long-term gains in order to sell quickly. They try to game the system and make a quick buck in a few months, or they simply get scared when there is a downturn in the market and want to catch up quickly before they lose everything.
Investing in real estate forces you to have a longer commitment, especially when you consider the effort and cost involved in closing the transaction and maintaining the property.
Capital requirements
Other investments like stocks or mutual funds may only require a few thousand dollars (or even a few hundred dollars) in order to establish an account. However, investing in real estate will generally require a much higher investment. When you think about the cost of a typical home these days (and when you keep in mind that you typically have to pay about 20% of the purchase price as a down payment), you realize that you will need to invest tens of thousands of dollars.
Since many people do not have this kind of money available, they may need to save their money and invest in other ways so they can come back to real estate in the future if they choose to. However, there are some lower-cost methods of investing in real estate such as real estate investment trusts. We will discuss these investments in other articles, but you can basically think of these as buying stocks in a company that directly owns real estate property.
Risk
Real estate has tended to offer a return of about 10% a year. However, this is only if you look at things over the long term. In any given year you can make less than this, and you can even have a steep decline in a single year such as we had in the late 2000s. Once again, this emphasizes that you should be committed to real estate for several years or more in order to minimize the risk of losing your investment.
