Pros and Cons of Property Investments

There are two common types of investment properties:

1. There are properties where the owner intends to purchase the property for as little as possible, fix it up or improve it in some way to increase the value, and then quickly “flip” the property for a profit.

2. There are properties where the owner intends to keep the property for a significant period of time to let the value appreciate. They may also choose to rent or lease the property for additional income.

Let’s look at some of the pros and cons of purchasing investment properties from this second group.

Pros of Property Investments

Spending money on investment properties can offer several benefits over other types of investments, including:

1. Investment properties are a generally stable long-term investment, making them less risky than other types of investing. Short of an economic disaster, investment properties are a reliable appreciating asset, making them ideal for those wanting to accrue income for later down the road (such as for a baby’s later education or for retirement).

2. Property investments put an asset in the hands of the investor, and that asset can be borrowed against.

3. In addition to the capital gains with the property’s increasing value, investment properties can earn the investor recurring income during the life of the investment if they rent or lease it out. In many cases, this rental income covers the cost of regular mortgage payments and maintenance of the property (expenses the owner would otherwise pay out-of-pocket, which would decrease the overall gains upon later selling).

4. You don’t have to fully finance the investment with cash on hand. You can get a mortgage to finance the investment.

5. Investments in property can carry tax benefits, such as tax deductions for interest on the mortgage or on repair and maintenance costs (similar to a business owner deducting regular and necessary business expenses).

Cons of Investment Properties

While they can be viewed as a relatively “safe” investment option, investment properties also have some downsides, such as:

1. Funds tied up in investment properties aren’t liquid. To access the funds, you have to sell the property, and that can take several months or more depending on the real estate market.

2. While some or all of the costs can be covered through rental income, investment properties still carry maintenance costs that other investments don’t. Just staying on top of regulations, paperwork, and the time involved in dealing with improvements and repairs can make property investing unattractive to some.

3. You will owe capital gains tax on any appreciation.

4. Investment properties can tie up a lot of an investor’s capital in a single investment. If something were to happen, such as a natural disaster not covered by insurance, the full value of the investment might be lost without any backup, and the investor would still be liable for any additional money owed on the mortgage.

5. With many investment properties financed through a mortgage, you will be paying interest that doesn’t contribute directly to your total equity.

6. There can be a high cost of entry into real estate investing.

7. There is always the potential that you won’t be able to attract enough tenants to fill your property (to bring in enough income to cover costs), or that you will have “problem tenants” that won’t pay, that will damage the property, or that will take a great deal of your time.

When deciding whether or not investment properties are right for you, remember not only to factor in the income potential, but all of the “hidden costs” in finances or time / sweat equity that you’ll be investing. You may even decide to hire someone to manage your investment properties if you’re attracted to the long-term safety and earnings but don’t want to physically manage the properties yourself.

Article correct at its author date: June 2008. Copyright Virtual Office Space, Any unauthorised reproduction of this article will be prosecuted to the full extent of the law. Credit Cards Australia.

If you would like to display this article on your web site please email us.