The Reasons for Choosing Real Estate for Investment

February 24, 2022

Real estate investment for businesses and households is considered one of the safest investment tools. In order to understand the reasons for choosing real estate as a tool in the investment that a natural or legal person wants to make, its advantages and disadvantages should be studied.

Advantages of Real Estate Preference

In general, the main advantages of real estate in investment are seen as the cash return it provides, protection against inflation, real estate value increases seen, reduced income uncertainty, systematic risk reduction, financial leverage, tax advantages.

The Return on Cash Provided by

The most important advantage of real estate investment is the return on cash. The fact that the investment provides a cash return makes it the preferred type of investment. The real return on investment is found by subtracting it from the inflation rate of the period.

Protection Against Inflation

One of the main advantages of real estate investments is that it protects against the effects of inflation. Income from real estate can be adjusted for inflation. The Gordon growth model clearly states that it provides good protection against inflation compared to fixed-income investments because it can adjust real estate income according to inflation.78

Real Estate Value Increases Seen

It refers to the increase in the value of the real estate by factors such as location, transportation in connection with demand and supply. Demand pressure in response to limited land supply in the real estate market leads to an increase in the value of the real estate, especially in urban areas, and an increase in this value is encountered over time.

Decreasing Income Uncertainty

It is also included in the literature as decreasing income variability.80% of real estate revenues vary less than income from securities.81 This situation appears before the investor as an important detail that sets the stage for choosing real estate because it provides an advantage as an investment type.

Systematic Risk Reduction

Systematic risk is a type of risk that affects the return on investment. It can be summarized as a situation affecting real estate and business due to changes in economic, political, and social factors.82 The prices of securities and real estate prices are moving in the opposite direction. This is explained by the fact that stocks with a decreasing value cause real estate prices to rise, or stocks with an increasing value cause a decrease in the price of real estate.83 The presence of real estate in the stock portfolio also significantly reduces the reverse movement, minimizing the risk.

Financial Leverage

It constitutes one of the most important advantages. It creates leverage with the financing provided by foreign resources. Borrowed funds are provided through the created leverage, which leads to an increase in the return on equity.

Tax Advantages

If compared with other investment vehicles, there are many more tax exemptions. The return on investment also increases compared to other tools.

Disadvantages of Choosing Real Estate

In general, the main disadvantages of real estate in investment are; liquidity problems, loss of principal, long-term investment, increase in investment cost, income, and continuous mobility according to market conditions.

The Liquidity Problem

One of the most basic disadvantages of real estate investments is the liquidity problem.85 Liquidity risk can create obstacles to investments in the sector. Liquidity risk refers to the inability to convert the owned asset into money at any time, to dispose of the asset below the current market value. Based on this definition, it is seen that when we need to dispose of the real estate urgently, its sale to a value below the market price can be realized.

Loss Of Principal

Changes in economic conditions after the purchase of the real estate, destruction of real estate, as well as the destruction of capital used in the purchase of the real estate, lead to the loss of principal.

Long-Term Investment

Real estate investment is long-term and it seems that it cannot provide the expected return with a low profit or unprofitable sale when it is necessary to sell real estate in the short term, which may be much more profitable in the long run in the bad course of the economy, in the short term.

The Height of the Investment Cost

Another disadvantage of real estate investments is the high cost of investment. Failure to provide the necessary budget for the realization of the investment leads to a tendency towards investments that can be returned in a shorter time and provide higher profitability with the available liquid resources and the debt limit that can be taken at risk.

Continuous Mobility According to Income and Market Conditions

The volatility of real estate investments according to income and market conditions is seen as another disadvantageous situation. Changes in real estate values occur according to the country’s market conditions and the investor’s income growth. Negative changes in market conditions also lead to real estate depreciation. In the case of good market conditions, investment, which is advantageous in line with the increasing demand for real estate, leads to a decrease in the value of the real estate and the fact that real estate is not an investment choice if market conditions are bad, with the opposite direction of movement, which leads to a decrease in the value of the real estate.

Real estate, which is facing the situation of being defined as a dead investment with its disadvantages, is the most preferred investment after gold in Turkey with the advantages it provides. People purchase their cash inflows in advance for the next period by planning the profit return that they intend to obtain with rental income or the sale of real estate in the future period with real estate. The real estate sector is constantly dynamic due to the need for housing, which is one of the most basic needs of people in a country with a constantly growing population, and due to the fact that it creates an advantageous type of investment that can pay for itself with the right investment.

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