Investors must carefully review the disadvantages to investing in real estate including
• illiquidity,
• market is local in nature,
• need for expert help,
• management, and
• risk.

Illiquidity

While liquidity is the ability to sell a property quickly without affecting its market price, illiquidity is the opposite. If a need arises to “cash out,” can the investor sell the asset without taking a loss? For example, a savings account is liquid because the investor can go to the bank and withdraw funds without loss. An apartment building owner may not be able to sell the property quickly at all, and even then maybe only after dropping the price below the initial cost.

Market is local in nature

Investments in stocks is not local in nature. A share of Amazon will sell for the same whether the investor is in Chicago or Palatka. A real estate investor who owns a large apartment complex in Palatka, however, is very concerned about the local economy. If the largest employer in the area closes its plant, the apartment investment might experience significant losses.

Need for expert help

Investors who purchase large properties will need experts to sort out the legal, accounting, marketing, and management issues. Many investors find it less complicated to buy mutual funds or index funds.

Management

Whether an investor buys a large apartment property or simply a duplex, management is required. The management may take the investor’s time, or the investor may need to hire a property manager.

Risk

Risk is the possibility that all or part of an investment will be lost. Real estate investment carries significant risk compared to savings accounts or index funds. Static risks (like fire, windstorm, and vandalism) can be reduced by insurance. Dynamic risk comes from changes in the business environment and can be reduced by careful analysis and management.

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Topic 17.4: Practice Activities >

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