Advantages and Disadvantages of Real Estate Investment

9 min read • Published 19 November 2022
Written by Krishna Deshmukh
Property Investment

If executed correctly, real estate investment strategies can help lower the overall risk associated with your investment portfolio. It offers the benefits of a predictable cash flow, reasonable returns over time and various tax benefits.

However, like any other asset class, real estate investments have both advantages and disadvantages. Investors should understand both sides of this investment option and estimate if it suits their financial requirements.

What Are the Benefits of Real Estate Investment?

Real estate investors make money through capital appreciation, rental income and business activities that use the property. These investors buy assets such as residential homes, commercial spaces and lands. Then, they rent out or sell the property to make profits.

There are several unique advantages of real estate investments. A prime property very rarely loses demand or value. Thus, it can offer high returns at moderate risks over time. However, investors need considerable capital and knowledge to achieve success consistently.

The following are the key benefits of real estate investment.

Property Investment Buffers Inflation

As the safety and security of real estate investments are widely accepted, many investors consider property investment as a suitable hedge against inflation. Historically, property price appreciation and annual rental yield have consistently outperformed inflation. 

Among the various advantages of real estate ownership, its potential to produce a constant profit makes it a preferred investment option.

Less Complex Than Other Investments

Before you invest in stocks or distribute your investments among several mutual funds, you  conduct rigorous research on its historical returns, risks, expenses, etc. On the other hand, when you decide to buy a property, fewer hassles are involved.

You neither study any algorithm nor follow a complex mathematical formula for estimating returns. Almost everyone has a basic understanding of real estate investments through real-life conversations with our family members or friends at some point in life. Thus, you have a greater sense of surety when investing in the real estate sector. 

Property Assets Are Listed At Reduced Prices

Local real estate markets have pronounced loopholes, and  even amateur investors can notice them. Property investment enthusiasts who follow local news and learn about the relative strengths of the neighbouring markets can pull off remarkable bargains.

Value of Real Estate Grows With Time

When analysing  prospects based on the advantages and disadvantages of a real estate investment, property appreciation should be the crucial aspect to consider.

As the market rates appreciate, the value of a property increases, allowing the owner to make a quick selling decision. Even if a property’s value remains stagnant for a long time, you can generate a regular rental income with proper maintenance and management. Thus, all investors should thoroughly research a particular locality before finalising their purchases. 

Real Estate Ownership Provides Tax Benefits

Section 80C of the Income Tax Act lets you claim deductions from your income when filing taxes. Under this regulation, you can claim tax deductions of up to ₹ 1.5 lakh in a  financial year for paying the principal amount towards a home loan and stamp duty and registration charges for the purchase of the property. Moreover, you can claim a deduction of up to ₹ 2 lakh for payment of interest under section 24 of the Income Tax Act.

In addition, you can take advantage of reduced tax rates levied on long-term capital gains through property investment. You may want to own a property sooner than later, whether to start a small venture or purchase the home of your dreams. 

Owners Perceive a Sense of Control

The value of a house tends to stay stable for a few months or a couple of years. Hence, the buyer gets a sense of security as the chance of incurring a loss is very low.

When you rent your property, you get to select the tenants and control the maintenance expenses. Thus, you take a more active part in controlling your investment. In contrast, when you acquire a company’s stock after researching its prior market performance, you have no control over your investments. 

Good  Capital Appreciation Over Time

Before you begin property tours, you should carefully consider several key factors like the state of the local economy, employment status, the average population’s age, etc. It is a good idea to purchase a residential apartment in an area where the  plots are in great demand. Then, you can rent out the flat or eventually resell it based on the value appreciation curve basis the supply and demand ratio.

Earn a Better Monthly Income 

You can choose to be a landlord who selects tenants based on their capacity to pay enough rent to cover all overhead expenses.  This way, you can adjust the rent to reflect  the inflation rate.

The second option is to enrol your property under real estate limited partnerships, or RELPs. These are private funds that pool money from many investors to invest in real estate on a large scale.

Through this, you can avoid the hassle of managing a property independently and simultaneously benefit from the returns earned for 7-12 years. Finally, the property is sold off based on the agreed-upon profit margin, and the partnership will dissolve.

Property Dealing Helps You Map Your Investments 

Another advantage of real estate investment is that  you have complete command  over the proceeds. You can control individual expenses related to property maintenance, unlike investing  your money in the shares of different companies, where you cannot control  the asset’s values. 

Subsequently, you can decide on your risk-taking capacity when it comes to other forms of investments where market volatility is a major factor.

What are the disadvantages of real estate investment?

High brokerage and legal charges are the foremost disadvantages of real estate investments. One requires considerable capital to start investing in this sector, and property investments are difficult to liquidate. Hence, Before purchasing a house, you should consider both the advantages and disadvantages. 

The following are some of the disadvantages of investing in real estate:

Regulations Associated with the Capital Gain Tax

Profit gained on the sale of  a property is subject to capital gain tax. If a person sells real estate within 2 years of buying it, its sales proceeds get added to the individual’s income and are taxed based on respective income tax slab rates. 

After 2 years, gains from real estate investment will be subject to a long-term capital gains tax. Whether the property was purchased or received as a gift, LTCG from the sale of such property is taxed at 20% with indexation benefit plus a 4% cess. Indexation takes into account the inflation during the holding period and accordingly adjusts the purchase price, thereby slashing the tax burden for the seller. 

Also, if a house is sold within five years of the end of the financial year in which it was purchased, the tax benefits claimed to go out of the window. The tax deduction claimed for the principal repayment, stamp duty and registration under Sec 80C are reversed and the amount becomes taxable in the year of sale. Only the deduction of the interest payment under Section 24B is left untouched. 

Owners Need to Maintain the Real Estate

Maintaining a property can be laborious and costly. The high capital requirement for supporting  overhead costs and repaying a home loan is one of the major disadvantages of property investment. In addition, one may have to pay for unexpected maintenance issues like a leaky roof or broken pipes. Repair charges can be substantial.

Property Market Research is a Time-Consuming Process

Property hunting demands sufficient time and experience. One needs to visit a location and check whether or not the builders are providing all the promised amenities upon buying real estate. Before locking in a deal, you must evaluate the reasonable price range and conduct background checks to ensure the value of your investment. 

Liquidity is Low

Not even the most skilled brokers can expect to secure a lucrative deal for your property holdings within a few weeks of listing it. When studying the advantages and disadvantages of real estate investments, budding investors usually find the documentation and legal processes to be a hindrance. Therefore, consider real estate investment a long-term commitment if you hope to fetch good returns. 

Rental Yield May Decline with Time

After 10-12 years of leasing out your property, there will be a time when significant depreciation may happen due to the  market’s inefficiency. Misinterpreting market conditions or sudden rush in purchasing a property without expert assistance can lead to massive losses. 

Therefore, managing real estate and meeting all the legal liabilities should be your primary concern to maintain the asset’s value. 

Final Thoughts 

Before estimating the optimum value of real estate, it is essential to consider the general economic factors of a location. Evaluating the advantages and disadvantages of real estate investments is vital. If your market research phase is well-executed, the chances of gaining long-term profits are much higher. So, if you intend to profit from the real estate sector, seek expert opinion and gather sufficient knowledge before investing.

Frequently Asked Questions (FAQs)

Is real estate investment better than gold investment?

Certain tax benefits are associated with principal repayments, maintenance costs, and depreciation in real estate. In addition, real estate ownership provides security as its valuation does not fluctuate often. 

Investment in gold carries some advantages, like its high liquidity and solid sentimental value. When it comes to better investment, people have preferences based on their financial situations.

Is real estate investment better than forex trading?

Although real estate investment requires more capital, it is still less technical. For beginners, forex trading can be overwhelming and ultimately, there are high chances  that they will lose money. However, expert traders can make huge profits in just a single day.

On the other hand, real estate investment is relatively less risky and likely yields moderate to high returns over time.

What is an interest subsidy for first-time homebuyers?

Under the PMAY (Pradhan Mantri Awas Yojana) home loan seekers who fall under EWS (Economically Weaker Section), LIG (Low Income Group) or (MIG) Middle Income Group can expect an interest rate subsidy of 6.5%, 4% and 3% on a loan amount up to ₹ 6 lakh, ₹ 9 lakh and ₹ 12 lakh, respectively.  To qualify for this scheme, the annual income for EWS, LIG, MIG-I and MIG-II should be up to ₹ 3 lakh, ₹ 3 lakh to ₹ 6 lakh, ₹ 6 lakh to ₹ 12 lakh and ₹ 12 lakh to ₹ 18 lakh, respectively.

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Krishna Deshmukh

Investment Principal
Krishna is an investment professional with a demonstrated history of working in Debt Capital Markets. He has completed his B.E. (Hons) in Computer Science Engineering from BITS Pilani and MBA (Finance) from JBIMS, Mumbai. He is currently working as Investments Principal at Wint Wealth. Previously he worked at Kotak Mahindra Bank at their DCM desk and Northern Arc Capital at their Structured Finance desk.

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