The advantages and disadvantages of investment in real estate

For years, the real estate prices in major cities and financial centres, such as London, New York, Shanghai, Beijing, are soaring sharply. Therefore, investing in real estate becomes a safe and profitable investment opportunity, that is suitable and almost designed for many middle class families. Today I would like to discuss about the advantages and disadvantages of investment in real estate, the real estate I want to talk about is housing (houses and flats).

There are many obvious advantages of investing in real estate. Firstly, the real estate prices in big cities are unlikely to fall in long term and are almost certain to having an increase long term trend.  As big cities always attract more people due to the opportunities and resources they have, more people living in big cities will absorb more resources and opportunities, such multiplier effect is unlikely to stop unless the global population has got a sharp and immediate reduction, which is only likely caused by diseases or natural disasters. Therefore, the returns of investing real estate are relatively positive and secured. Secondly, sometimes owning one or more houses and/or flats can have some side effects. For example, it can increase one's credit rating and make him/her easier to borrow from his/her bank at a relatively cheaper interest rate. Owning a well located house or flat can send their children to better schools and receive better education. These are all non money benefits. Thirdly, the real estate prices can fall but they cannot fall below zero; therefore, it has a safe net of the investment and even sometimes families may not be able to sell for more money they can own their houses and gain utilities from their houses. They can lend their houses or flats to receive rents and increase their family incomes.

However, investing in real estate can have disadvantages. Firstly, to families, investing in real estate requires a relatively big amount of  money as the initial investment, it has an enormous opportunity cost. Secondly, investing in real estate has a liquidity issue that selling houses and flats requires a relatively long period of time. Thirdly, the scheduled payments will reduce incomes in short term and affect short term living standards.

Overall, if you have better investment skills in a wider selection, the liquidity and opportunity cost issues should draw you away from real estates towards equities or bonds which are more liquid than real estates.