Investing in Real Estate is great. You could generate passive income, hedge against inflation, and you actually have a physical asset to fall back to when you need it. But is investing in real estate as safe as it seems?
Would you rather buy a share in a company or would you rather buy the entire business? Most would answer that they prefer owning shares, getting the returns and not having to go through the headache of managing the entire business, and the expenses it comes with.
Owning houses, lands, blocks, or any other type of real estate is the same as owning a business. You are going to have to put in a lot of capital to develop it, put in time and effort to maintain it, and hope that it generates the returns you expect it to generate.
Many think of real estate as a safe investment, which could be true in certain scenarios. You are actually owning a physical property instead of a claim on some assets. Put aside the fluctuations in the real estate markets across the globe, we often forget how hard it is to preserve the value of a real estate asset and generate money out of it.
While there are a handful of ways to grow your money, some traditional ways of investing come to mind: real estate, stocks and bonds. Deciding how to allocate your hard-earned cash into one could pose some added perplexity.
In this post, we will look into the four reasons that will help you decide on what investment is best for you and how having a diversified portfolio is a great way to invest.
1- You need much more capital to own property
Financial instruments have been evolving throughout time and getting more and more affordable to anyone who wants to invest. You can buy an exchange traded fund (ETF) in 2019 that can give you exposure to different class assets, and thousands of different stocks in different markets for the price of one single stock. The Vanguard VTI ETF contains over 3,500 stocks that would give you exposure to the entire US stock market and provide diversification for a mere 150 US dollars. ETFs include real estate, such as the Real Estate Asset Class ETF that allows you to achieve diversification within this industry and lower your exposure risk.
On the other hand, the average house price in Dubai is around 670,000 US dollars. In the best of cases, you would need enough money for at least a down payment to purchase that home. If you are looking to mortgage – which is the case of most buyers – keep in mind that you will be paying around 6% annually in interest, in Dubai as of August 2019, as well as a registration fee.
2- Real estate is very illiquid
Owning a portfolio of stocks in 2019 has become so easy that you can do the entire process online without even having to visit the actual offices.
Want to go on vacation? No problem you can access your dashboard and check how your investments are doing from your phone.
Want to buy more stocks? You can fund your account instantly by linking your bank account – and even doing automatic monthly payments.
Want to sell your stocks? Sure, you can just drop a line and make it happen within a day or two.
Owning real estate? Not that easy.
Your property is a physical asset that can not be moved.
If you want to expand your portfolio, you need an upfront sum of money, and many hours of paperwork. It’s a lengthy process. If you need to sell your house quickly for an emergency, you are going to have to find someone who is willing to buy a house in this location and at that price.
Months may pass before the property is sold or rented.
3- Real estate has much more fees
Fees play a major role in your future wealth, as high fees eat away your returns.
When investing in real estate, you are going to have to incur different fees – that change from market to market. Few examples: property taxes, insurance fees, service and maintenance fees, broker fees, agent fees, and other miscellaneous fees that would reduce your net profits.
And if you’re buying an investment property to rent out, you’ll be losing money any time your unit goes unoccupied.
According to Mortgage Finder, these are the fees you need to be aware of here in Dubai.
4- It is going to be really hard to diversify your properties
Diversification is the act of not placing all your eggs in one basket. You can buy a variety of stocks/bonds from different markets and diversify your exposure without needing a very large amount of capital. Due to their relatively low cost, ETFs became the tool of choice, allowing you access to thousands of different stocks at the price of one. ETFs are one of the most efficient instruments of diversification. You can invest in funds that reflect different demographics, indices, and risk tolerances.
Diversifying in properties requires a lot of money. Generally speaking, most people invest into one property and end up locking their money into one single asset that is not liquid.
In conclusion, you want to choose an investment that reflect your goals.
Real estate might be a good investment tool: buy that apartment that you want to eventually live in and let the tenant pay your mortgage. That’s the ideal scenario. However, with real estate you are holding a physical asset that requires a big upfront capital, is not liquid, and has many fees and efforts attached.
A Sarwa portfolio gives you access to different ETFs, including the Real Estate Asset Class ETF that allows you to achieve diversification within the real estate industry and lower your exposure risk.
Surely you want to choose the best investment that helps you build wealth. But ultimately it’s a matter of choice, investing style, and upfront cash flow.
Ready to invest in your future?