It’s easy to see why real estate is such an appealing investment option.
Residential property is all around us and unlike stocks or other asset classes, we all broadly understand how to make money from real estate.
You buy property, rent it out to pay off the mortgage, and eventually sell it for more than you bought it for.
Simple.
Well, we all wish it was that simple. And as a property investment advisor in Melbourne, you might think that I would paint a rosy picture of real estate investing where it is all upside with no downside.
That’s what I’d love to tell you, but it’s not the truth and it’s not the way I’m built. A big part of successful real estate investing is being honest with yourself and those you work with.
In this article, I’ve compiled a list of 10 advantages of real estate investment, and I’ve paired each pro with a related drawback you could experience.
That’s 20 facts about what the world of real estate could have in store for you.
If you’re still serious about investing in real estate at the end of this article, I would love to chat with you about my approach to generating real wealth through real estate.
My name is Andrew Stone from Property Analytics, and here are 10 pros and 10 cons of investing in real estate.
PRO #1: The Average Annual Appreciation of Houses in Melbourne is 8%+
There aren’t many asset classes that you can rely on to consistently appreciate at around 8% a year, but Melbourne real estate is one of them.
Generally speaking, you can expect any well-chosen property to appreciate over time.
This doesn’t mean that there won’t be corrections in the property market that hurt the value of your investment.
And it doesn’t mean that you can’t lose a lot of money by choosing the wrong property in the wrong place at the wrong time.
But with the right research and guidance, you can look forward to strong annual appreciation on your real estate investment over the long term.
CON #1: Interest, Income, and Profits Can All Be Variable
Yes, investing in real estate is considered “as safe as houses”, but no, that doesn’t mean things won’t vary.
Interest can vary depending on a range of factors, and we’re not just talking about interest rates. We’re talking about interest in your property.
Depending on the state of the property market and the wider economy, consumer confidence can go up or down. This may cause your rental income to drop and the value of your asset to decline. At different points in time, there may be little to no interest in people wanting to rent out your property or buy it for a profitable price.
Maintenance costs will also vary over the life of your property, and the longer you hold your asset, the more chances there are for something else to go wrong. To avoid catastrophic maintenance costs, it’s essential to ensure a property is structurally sound before you buy it.
Of course, actual interest rates can also vary, which will affect your monthly repayments, and the implications of property taxes can range from beneficial to detrimental depending on your overall financial position.
PRO #2: Real Estate Offers More Stability Than Other Investment Classes
When you leave annual appreciation and general variability aside, you’re still looking at a very stable asset when you choose real estate.
Yes, the property market goes up and down, but a more reliable growth trend means you can still take advantage of capital growth in the long run, assuming you buy and sell at the right time.
You can sometimes see investors losing millions overnight on the stock market, but it’s safe to say that the property market just doesn’t work this way!
CON #2: Real Estate Investments Take Time
Things don’t move as quickly in the real estate market, and while that means reduced volatility, it also means you need to be patient.
Real estate investing takes a long time in many respects. Firstly, a large body of work should go into selecting the right property for your investment. Once you’ve selected your property, you still need to be successful in buying it.
From there, managing a rental property can take up a lot of time – either your time or the time of the professionals you are paying good money to do it for you.
And if you’re going down the path of renovating or developing on your land – you guessed it – that will take time too.
Generally speaking, real estate investments are long-term investments. The huge, wealth-generating benefits of capital growth are what most people want, and it takes years for capital growth to reach its full potential.
Even if you’re planning to “flip” a property, you’re still looking at months to select, secure, renovate, and sell your investments.
On the other hand, you can usually buy and sell shares in moments, and if you’ve timed it right, you can enjoy big gains.
So yes, investing in property takes time. But yes, it can also be well worth the wait!
PRO #3: You Can Generate Positive Cash Flow with Real Estate!
Seeing your shares go up in price can be exciting, but you can’t actually use that money unless you cash out – and then your investment is over.
With real estate, you can generate passive income as long as your rental income is higher than your monthly mortgage repayments (and any other monthly payments you need to make).
With a higher rental yield, you can enjoy an investment that pays for itself, plus a little bit of extra cash that you can start using for anything you wish – including your next investment.
CON #3: Higher Ongoing Costs Associated with Investment Properties
I’ve already mentioned that investing in real estate will cost you time. And if it’s not costing you time, it’s costing you money (or it’s costing you both).
Buying and selling shares often comes with a small management fee, but while you’re holding your shares, it’s costing you nothing (except for the money you lose if it drops in value).
With property investing, you need to think about maintenance costs, insurance, council rates, owner’s corporation levies, advertising fees for finding a tenant, and professional service fees for a property manager.
And that’s just naming a few.
Your rental income might be enough to offset all of that, but it might not. And tax breaks might give you all the help you need, but they might not. If you’re not interested in using your investment as a rental property, some of these expenses might not apply to you.
But regardless of all this, it’s important to consider all the costs associated with holding an investment property before you get started.
PRO #4: Real Estate Investment Unlocks the Power of Leverage and Equity
Leverage is one of the most powerful tools available to you as a real estate investor. Basically, this is the process of using borrowed capital (debt) to make your next move in the real estate market.
Leverage works because you are allowed to buy, control, and benefit from an investment property without paying the full price.
If you look at the common scenario of a 20% deposit, then you can buy an investment property worth $800,000 for just $160,000 upfront.
If that property appreciates a modest 5% in a year, it would then be worth $840,000 – a $40k increase.
But if you took that $160,000 and bought something outright, it would only be worth $168,000 – still a 5% increase, but $32K less for the same upfront price.
Better yet, you can take advantage of your property appreciation by refinancing and accessing a pool of money that you can use to make your next investment.
Finally, if you also have rental income that is paying off the capital on your mortgage, you are building equity in the property. This allows you to access even more funds, because not only is the property worth more, but your remaining debt is worth less!
CON #4: The Risk of Overleveraging
Leveraging can be highly beneficial if you understand the risks and act wisely. But ultimately, it still involves playing with borrowed money, so too many wrong moves could be dangerous.
Overleveraging is when you’ve borrowed so much money to keep making investments that you can no longer afford to keep making the minimum mortgage payments.
Maybe the market has dropped and your properties are suddenly worth much less, not more. Maybe repair and maintenance costs are spiking while rental income is drying up.
Your debt has become a burden that you cannot manage.
This may sound dramatic, and with the right advice, you can afford overleveraging. But becoming overleveraged is an all too common pitfall for over-eager investors, and they can quickly find themselves stuck in deep waters.
PRO #5: The Tax Benefits of Investment Properties
You can take advantage of several tax breaks when you own an investment property, most notably negative gearing.
Negative gearing is when the combined costs of your investment property outweigh the rental returns that are coming in. This puts you in a position of net loss, but you can then write this off at tax time.
Let’s say that you lost $5000 on your investment property in the financial year. Negative gearing allows you to remove $5000 from your taxable income, which reduces the overall amount you’re taxed on and may even move you into a lower tax bracket.
Some investors deliberately pursue a negative gearing strategy that focuses on lowering their taxable income and waiting for the property to generate capital growth.
Investors can also claim for the interest charged on their loan, as well as property depreciation (natural wear and tear), and certain rental property expenses.
CON #5: The Tax Drawbacks of Investment Properties
Investment properties can also add to your income tax, which is something to consider if you’re concerned about cash flow.
Any rental income you earn when your property is positively geared will be added to your income tax. This could ultimately push you into a higher tax bracket.
You will also face taxes for any profits you make when you sell your investment property (Capital Gains Tax), while an annual land tax may also apply.
Another potential tax drawback is choosing to pursue a negative gearing strategy without job stability. If you lose your job and you no longer have an income tax to reduce, then your negatively geared property is simply burning a hole in your pocket. If you cannot increase your rent or generate money from elsewhere, you may have to sell your investment.
Similarly, if your wage isn’t increasing, then a negative gearing strategy may have little or no benefit for you.
PRO #6: Real Estate Is a Physical Asset
Asset classes like bonds and shares can seem so abstract, but real estate is real.
You can visit your investment property. You can see it and you can touch it.
If the need arises, you can live in it, you can switch to a rental yield model to generate income, or you can knock it down and start building a series of townhouses.
Said simply, having a physical asset as your investment is not only comforting but also practical.
CON #6: Real Estate Is Illiquid
Having a physical asset is great, but the problem with real estate is that it’s a physical asset with low liquidity. In other words, it can be much harder to buy and sell property compared to shares and other asset classes.
This makes it harder to get started in real estate investing, and it can put you in a tricky situation if you need money and you have to cash in your investment.
Selling property and accessing that money takes time, and even refinancing to leverage equity requires you to navigate the endless red tape and bureaucratic checkpoints that come with dealing with a lender.
PRO #7: You’re in Control and Can Actively Add Value
When you choose to invest in shares, that’s pretty much the last investment decision you’re actively involved in until you choose to sell.
Whether or not your shares grow or shrink in value is dictated by uncontrollable market forces and decisions that are being made by other people, probably sitting in a boardroom in a country on the other side of the world.
Real estate is local, not transnational, meaning you are right there and actively involved in the decision-making process. From the moment you buy, you can start making choices that add value to your property
You get to choose whether you’re primarily pursuing capital growth or rental yield, positive gearing or negative gearing.
Most of all, when you choose the right investment property, you can quite easily add value to it through smart renovations and improvements.
If you want to take this one step further, you can target blocks that are ideal for developments such as duplex construction or multiple townhouses. Sometimes, you can even buy blocks that are already approved for specific development projects.
With our Melbourne property development consultants on your side, you can expertly select properties for development and have all the plans approved so you’re ready to build as soon as possible.
Sure, you’re still dealing with some uncontrollable property market forces. But you can smartly renovate your investment or turn one property into two, three, or more. This is a great way to actively increase the value of your investment, even when the market is flat or slightly down!
CON #7: Investment Properties Are a Big Money Expense
Yes, you can actively add a lot of money to the right investment property. But real estate is also expensive to buy upfront in general. Any property worth investing in will come at a comparatively high price (even if it is a bargain), and this comes with inherent risks.
Sure, you can get into the market with a 20% deposit (or maybe less), but that other 80%+ will always be looming large in the background.
If something does go wrong and you need to sell, you’ll have to pay off a mortgage worth hundreds of thousands of dollars. And that price doesn’t drop just because your property value does!
Investment properties are big-ticket items that come with big risks, but also big rewards. It’s up to you to navigate those risks and come out on top.
PRO #8: You Can Build a Portfolio of Investment Properties
The aim of any investor is to build a strong and diverse portfolio that yields long-term gains. Ultimately, you want to be rich enough that you can forget about investing altogether and retire on a beach somewhere!
With investment properties, you can take advantage of a high-performing property to generate money that’s used to buy your next property. And your next one. And your next one.
You can invest in some properties that are positively geared and others that are negatively geared in a range of different high-performing suburbs.
And it’s possible to do all this without having to sell a single property, meaning your portfolio just keeps growing and generating robust long-term returns.
We’ve already discussed positive cash flow in point 3 and leveraging equity and debt in point 4, so we won’t revisit this here. But needless to say, real estate can be one of the best asset classes if you want to continually build and strengthen your investment portfolio.
CON #8: Higher Costs for Buying and Selling
Building your portfolio is all well and good, but you’ll need plenty of funds every time you buy a property. Sometimes you can access money by leveraging an existing investment, but you will invariably need to dip into your own pocket too, especially for your first investment property.
Buying costs for real estate can include:
- A substantial deposit
- Stamp duty
- Legal fees
- Transaction costs and transfer fees
- Mortgage application and registration fees
- Lenders’ Mortgage Insurance (LMI)
- Connection or reconnection fees
- and more!
Selling costs for real estate can include:
- Advertising fees
- Auction fees
- Legal fees
- Building reports
- Any maintenance required
- All costs related to discharging your mortgage, including early repayment fees
- Capital Gains Tax
- and more!
This is without mentioning the ongoing costs or holding costs associated with an investment property, which you can read about in Con #3.
PRO #9: Real Estate Often Outpaces Inflation
In 2022, we’re all familiar with inflation. This economic concept describes the rise in our daily cost of living due to the decline in the value or purchasing power of our money. Basically, it means your dollar doesn’t go as far.
For investors, inflation can also mean an erosion in the value of their assets. You see it all the time with the stock market. The actual profit you make from shares may be lower than the gains you see reported simply because of a reduction in purchasing power.
Investment properties tend not to have this problem due to their ability to keep pace with inflation and even outpace it in the long term.
Basically, as prices go up due to inflation, the rent you’re charging will also go up. Of course, interest rates also rise due to inflation, but theoretically, your increased rental yield should cancel this out. And if you have a fixed-rate mortgage, inflation cannot touch it.
This is why real estate investments are often called a “hedge against inflation”
Regardless of inflation, the right investment property will still increase in value over time, and you can still take advantage of equity, leveraging, tax benefits and more.
CON #9: Exceptional Sales People and Exceptionally Difficult Tenants
This drawback can occur regardless of inflation, but it’s only more frustrating when market conditions are difficult!
Let’s start with exceptionally difficult tenants. The nightmare tenant can add to your expenses by increasing maintenance costs and waste your time with disputes and even legal action! Of course, the worst tenant is sometimes no tenant, especially if you’re aiming for a strategy built around rental income and positive gearing. If you’re aiming to use your investment property as a rental, it’s important to do your research to ensure your property and your tenants are both working in your favour.
Now let’s talk about exceptional salespeople. On the surface, that sounds like a positive, but what we’re saying is that real estate agents are sometimes very good at selling properties. If you don’t know what to look for, you can easily be convinced to invest in a lemon!
Basically, what we’re saying is that there are bad eggs in the real estate industry – just like there are in every industry. Sly real estate agents, nightmare tenants, and dishonest property marketers who are masquerading as buyers agents are just the tip of the iceberg.
But when you partner with the right people, you can avoid all the negatives associated with those bad eggs, and much more!
PRO #10: Real Estate Investing Is Accessible
We mentioned at the beginning that real estate investing is easy to understand. Yes, there is a lot to learn but anyone can understand the basic premise in just a few minutes.
On the other hand, concepts like shares, stock markets, and bonds can feel very opaque to investors. And when you start researching, it can sometimes become more confusing, with lots of contradictory advice from “experts” with vested interests.
Said simply, investing in shares can feel like trying to break into an exclusive club while real estate usually feels like “the people’s investment”.
And the more you understand something, the less help you will need to be highly successful.
CON #10: It’s Easy to Get Lost in All the Real Estate Data
Have you ever heard of decision paralysis?
Basically, it’s when you’re presented with so much information and so many options that you simply can’t make a decision.
Real estate can be a bit like this. It’s easy to get started, but if you go down the wrong rabbit hole, you can quickly find yourself overwhelmed and unsure of what to do.
It’s important for investors to have access to reliable data, as well as someone who can tell them what that data means and how to take advantage of it.
The Melbourne investment consultants at Property Analytics can give you access to proprietary data and analyses that help you make smart investment decisions. Our data is so highly valued that some of the real estate industry’s biggest names pay for access to it.
As a Property Analytics client, you get this valuable data included as part of the service. Best of all, I will help you understand the data and actively provide services to find and secure the right investment property with the best strategy for your overarching goals.
Want to Learn More About Real Estate Investing?
At Property Analytics, my team and I take a data-driven approach to finding and securing high-growth investment properties and development projects.
I won’t just advise you on real estate investments. I’m also a specialist buyers advocate in Metro Melbourne – from Kew East to Brunswick to Northcote. My services cover everything from shortlisting to bidding and negotiations to getting all the paperwork in order so you can start developing.
A big part of what I do is also advice and education. If you would like to learn more about investing in residential properties in a manner that leverages the pros, mitigates the cons, and generates real wealth, reach out today for a discussion!
