Financial Education

Direct investments in real estate offer a number of advantages and disadvantages relative to other asset classes.

Advantages

• Tax subsidies for certain expenses (depreciation, mortgage interest)
• Access to low-cost financing via mortgages (improved leverage)
• The ability to take action related to property management confers a control premium
• Owning multiple properties can confer geographic diversification
• Compared to equities, real estate returns are less volatile

Disadvantages

• Properties often cannot be divided, so each can represent a large position within the portfolio
• Uniqueness of properties results in high costs for gathering information
• Brokerage commissions are high
• Operating and maintenance costs are high, and special expertise is often needed
• Potential risks such as neighborhood deterioration can be outside the owner’s control
• Tax advantages are subject to political risk

For more information, see all articles on: Active Management, Alternative Assets, Investing in Real Estate, Investment Returns, Portfolio Management

See also:

Types of Real Estate Investments

Benchmarks for Investments in Real Estate

Characteristics of Investments in Real Estate

The Role of Real Estate in a Portfolio

Types of Alternative Investments