Real Estate Investment – Benefits vs. Risks

Many people jump into the real estate investments thinking that they are very beneficial and they do not consider the risks involved in this kind of investments. There are many factors which can catapult the market and completely change the scenario of real estate investments. Real estate investment also provides many benefits to the individual investors. Besides bonds, stocks and cash, real estate is the 4th most important form of asset. Many financial advisors think that at least 30% of the overall investment portfolios should be invested into real estate.

real estae risk

Benefits of investing in real estate

Some of the most common benefits achieved as a result of investments in real estate include:

Tax benefits

Real estate investment carries the most valuable tax benefits. The structure of the investments and diversity defines the tax benefits applicable in each case. Tax benefit can be gained…

  • On the losses in the takeovers
  • Amortization
  • After termination, transfer of capital gains

Capital gains

Capital gains are realized when the properties are sold. People who make investments in real estate purchase and sell [properties for their own benefits and thus benefit from the capital gains which arise on each sale.

Inflation hedge

Investors can hedge inflation through real estate in the following methods:

  • Decline in the real value of investment value (historical cost)
  • Decline in the real value of mortgage
  • Increase in the nominal value of property

Diversification

Real estate makes any portfolio diversified and stable to a certain extent. This is the reason why financial advisors suggest that at least one fourth investments of any portfolio should be invested in real estate.

Risks involved in investing in real estate

Financial risk

It is easier to control financial risk. There are two basic elements that can be adjusted to balance the financial risk:

Borrowing

Financial risk is reduced to a greater degree if the borrowings or finance taken for investments is not really high and is payable back. The financial risk increases when the borrowings increase as the loss will result in great financial setback as well as leave the individual indebted.

Type of investment

Risk related to each category of investment varies. Investment related to real estate is generally categorized as low but at the same time it also depends upon the market stability. The risk can be high if the market is volatile due to national or international issues, political events or general inflation.

Tenant risk

It is necessary to make sure that the investment in real estate will result in higher returns. People can secure their leased properties by making sure that they follow the correct procedure and credit check when hiring tenants. Tenant risk is more focused on the retention of existing tenants. If the tenants are credibility sound, then the risk is reduced.

Market risk

Real estate market has always been considered as risky. But now that the supply and demand process has become more transparent, the real estate market has stabilized. Market risk involves the national and international conditions. The market risk can be lowered when prime locations are bought or leased for investment purpose. If the demand is very high, the returns will be high as well.

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