Advantages and Disadvantages of Direct Real Estate Investments

First things first, what is real estate?

The most basic definition of real estate I can give is that real estate is a piece of land with bricks and mortar. However, we can fancy this definition up and say, real estate is considered to be buildings and buildable land. This is a tangible asset that can be seen, touched, pointed at and one can even say, “That building there is mine, its my real estate”. And like I mentioned earlier there is real estate that falls under the investment category and some that don’t. A house one owns and lives in is not an investment in real estate but as an investment category, real estate is one of the most enjoyable assets that one can own, especially direct ownership in which it is fully paid for

I know what you are thinking, how do I enjoy a house I don’t stay in?

  1. Are you forgetting those monthly rentals that come on the 1st like clockwork?
  2. What about the bragging rights that you have…”I own this house?” The rights entitle you to “King” status when you are within the premises of the property, its full ownership rights for an indefinite period of time. Do you remember that statement, “My house, My Castle”…you are the King of your Castle! You are the chief in your boma!
  3. Any business idea that you have, you have sitting equity in the form of a house. You can walk into a bank and tell the manager, “I need a $50 000 loan to start a business, I will give you my $2 000 000 house as collateral.”
  4. If well maintained, this is an asset with longevity, you can forsee the rental incomes into your grandkids’ generation
  5. Its easy to keep your asset as it is very hard to dispose, you can’t be short of $2 000 and sell a house, you sell a car for that not a house
  6. If things ever go south, you have a fall back position, you can sell it at will.
  7. During economic recessions, hyperinflationary periods when people are panicking, prices going haywire, real estate can easily maintain its value, it takes major movements to shake real estate.

To make it more scholarly, the advantages of investment in real estate are

  1. Rental Income
  2. Full Ownership rights
  3. Real estate can be used as collateral
  4. Longevity…if built right, it can stand for a very long time to come
  5. Long term asset….you can have it indefinitely
  6. Not directly correlated to economic cycles
  7. Stores value

As a grown up, I need to educate that there is nothing called “free lunch”. There is absolutely no way that there would be such splendid advantages to owning a real estate investment without a price. There has to be disadvantages and below are the following disadvantages of owning real estate investment;

  1. Tenants are a stressful and demanding lot, they always want you to fix something, the plumbing system, the geyser, the window, the ledge, the window opener, the door handle. And at certain points you wander if they are just trying to get their rental payment back with the constant demands…(the demands are not that constant, I am being dramatic for effect)
  2. Buying the property leaves you walking to work and the kids eating bread only…no money left for condiments and no money left for fuel. It takes lots of sacrifice.
  3. If you decide that other people should manage the property, they will charge you so much that you wander if you now co-own the property but you didn’t get the memo.
  4. If you ever get tired of the neighbourhood where your house is, you just can’t move it. The asset is that big and immoveable
  5. Trying to sell the real estate will have you calling your ancestors, it is not that easy, it takes time.
  6. The worst of all, even though you know how much you bought your house for or how much you built it for, you never know the actual value of your real estate. Imagine that big an asset and your best guestimate is “With these two properties, I am probably a millionaire by now’

The scholarly way of looking at the disadvantages;

  1. Individually managing the properties is cumbersome
  2. It requires a huge outlay of cash to buy a property
  3. Transaction costs and management fees are high
  4. Property is immovable
  5. Property is illiquid, it does not sell very fast
  6. Each property is unique, and therefore, ‘market value’ of any property is difficult to ascertain.

This is the 2nd part of the 5 part series, please subscribe to get the articles in your inbox.

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