Editorial Invest in Slovakia
Before we discuss the advantages and disadvantages of investing in real estate, let's briefly clarify the difference between an asset and a liability. In simple terms, we consider an asset to be something that brings us money, i.e. it gives us a positive cash flow. Conversely, a liability is what takes money away from us and is a negative cash flow.
In practice, therefore, a property in which we live and it does not bring us any positive cash flow cannot be considered an asset, but it is a liability because it takes money away from us. Conversely, a property that we have bought for the purpose of renting it out again can be considered an asset.
Benefits of investing in real estate
Physical investment
The first advantage of investing in real estate is putting money into a tangible asset. We can touch the investment unlike investing in mutual funds or stocks where the entire process is done digitally using binary code. If nothing unforeseen happens, we will continue to find our property in its place.
A basic human need
Housing is a basic human need, which is defined in Maslow's pyramid of needs. We are all looking for a place where we can settle down, feel safe and carry out other needs such as hygiene or our hobbies. For these reasons, there will always be a demand for both housing and rentals in desirable locations.
Lower volatility
The real estate market has lower volatility, or volatility. It speaks to how quickly the price changes over time. Volatility is a natural characteristic of any market and implies a degree of uncertainty for investors. Markets constantly rise and fall as they react to supply and demand. The higher the volatility, the higher the risk of the investment. If we compare the stock or commodity market with the real estate market, we find that it has lower volatility because it changes by a few units of percent per year whereas commodities and stocks change by a few units of percent per day. Therefore, we consider real estate to be more stable with more predictable developments.
Two yields
Real estate delivers two kinds of returns in one. They combine capital appreciation along with cash flow. The first mentioned, capital appreciation is a type of income that is achieved by the rise in the price of real estate. By cash flow we mean the income from rental properties, but the vast majority of investments within the financial market achieve only one of these incomes.
Financial leverage
One of the biggest advantages that real estate investments provide is the ability to leverage. It is the only form of investing where a bank will lend us money to buy and acquire an asset. They are very happy to do this because they have a lien on the property in question. Another advantage of investing in rental property is that someone else is paying us for the loan provided by the bank.
Exemption from taxes
The Income Tax Act regulates the ways in which income from the sale of real estate can be exempted from tax. If we have owned the property for more than 5 years or it has been exempt from business property for more than 5 years, the income from the sale of the property is exempt from income tax and health insurance contribution. Income from renting out real estate is likewise not subject to the obligation to pay the health insurance contribution.
Check
Control over the investment in real estate is another advantage that mutual funds or stocks will never allow us. We have no control over their management or the management of the company, but just the opposite. We are paying the mutual fund manager and the management of the company to take control of our investment. When we invest in real estate, we have the ability to react operationally and decide whether to increase or decrease rents.
Depreciation and costs
If we have commercial real estate we can take advantage of depreciation and take a 1/40th deduction on our taxes each year for the value of the property. It is also advantageous to deduct the costs associated with the mortgage payment from the tax basis and all costs associated with running the property.
Disadvantages of investing in real estate
No investment is without risk, and real estate comes with its drawbacks, so it's a good idea to know them before you start investing.
Higher initial investment
This is one of the major drawbacks because banks have tightened the conditions for taking a mortgage loan and you need to invest 10-20% from your own resources. Still, after years, we will own a property that was paid off by someone else. However, there is an option to invest even with less initial capital through crowdfunding.
Less liquidity
It takes longer to sell a property and therefore we get to the money later compared to mutual funds where we have the money in the account within a week. In a situation where we would urgently need the money we have saved in the apartment or house, we expose ourselves to the potential risk of selling the property below the price.
Property management
Lack of experience in property selection, tenant selection, and management can lead to financial losses resulting from vacancy and from the potential deterioration of the facility by the tenant. This disadvantage is closely linked to another disadvantage, namely time.
Long-term planning
Investing in real estate requires long-term planning with thinking years ahead so that we can, for example, claim income tax exemption on the sale, which can save us a considerable amount.
Decrease in value
Investing is always associated with some risk, and with real estate it is a decline in value. Not in every situation are we able to sell an investment for a higher price than we put into it. The rise and fall of the market depends on the demand and supply in the segment. The long-term growth of the real estate market is punctuated by short-term downturns, so it is important to place emphasis on property selection and to be alert when property prices are at their peaks.
Sources: https://www.sora.sk/nehnutelnost-ako-forma-dlhodobeho-investovania http://ako-investovat.sk/clanok/791/realitne-fondy
