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Advantages And Disadvantages Of Real Estate Investment

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2.2 Opportunities (advantages) associated with real estate

Companies and citizens consider real estate as one important financial asset. One good reason for the entry and increasing popularity of real estate in an investor’s portfolio is the observed protection from inflation.

In order to show the advantages of investors in real estate, it is important to compare real estate to stocks or bonds. In case of stocks the real returns have a negative response to inflation in a short-term period as well as in long-term period.

This idea can be explained by considering two scenarios.

1. Scenario without inflation

Equilibrium on the Stock market

K (1+Q/R) = F (1+i)

K (1+r) = F(1+i)

2. Scenario …show more content…

As a result of this, a loss in real value of capital is very uncertain. A study on real estate Markets (e.g. Italy) has proved that inflation is the characteristic having the strongest impact on pricing developments of real estate markets. Inflation and the real value of invested capital has an inverse correlation leading to the conclusion that the risk inflation affects real value of invested capital is exposed to a low degree, so real estate investments provide protection from inflation. Because of the advantageous risk profile of real estate, the investor has a strong security about the invested capital. In contrast to stocks or bonds, the risk the value of real estate becomes worthless is very uncertain, so that real estate investments offer a perfect hedge against inflation. The aspect of hedging is discussed in detail in Chapter …show more content…

If the investor buys a house with the purpose of renting this house to another person, the owner has the duty to pay the mortgage and all the other costs such as tax. The owner has an extra advantage since he can deduct these taxes from the income of other sources. The tenant, of course, pays a rent over time covering a percentage of the mortgage and all the owner’s expenses necessary to support the property. When the mortgage is completely paid, the owner gets a regular rent per month. This is the principle of amortization of paying debts so reducing their payment over time. The owner intends to gain profit at the end of holding time after the tenant has paid the entire mortgage. Thus, the owner gains two forms of cash income. This graphs shows that the rental income which represents a percentage of the capital return remains very stable over the holding period. The second type of profit, which results at the end of the holding period by selling the propriety is in contrary uncertain because this profit might be affected by current unexpected economic events turning the investment into a capital loss. This extreme event is in the case of real estate investments very seldom. The eventuality of a total capital loss is of some rarity because the owner can still detract a profit by the piece of land the propriety is

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