Making an investment is an important decision, so it’s important to understand why you might choose to invest in real estate over other options like equities and fixed income. What are the opportunities and the associated risks? 

Knowing how to fund your investment will be key – seeking financial advice can unlock the door to the potential of your investment portfolio. 

There are also bigger, global trends to consider. Demographic, technological, and environmental forces could have an impact on the real estate market as a whole, and on your investment.  

Reasons for investing in real estate can range from diversifying your existing portfolio to tapping into a potentially appreciating market. But it’s important to consider the advantages and disadvantages of different investment types before deciding. 

Real estate can be a solid investment that offers you more control and diversification over other opportunities. 

You’re able to hedge your investment against inflation and typically enjoy relative stability compared to the sometimes-volatile stock market. 

What’s more, the long-term cash flow provides opportunities for passive income, leverage gained on capital, and the prospect of appreciation. 

But real estate isn’t the right choice for everyone. It demands higher transaction costs and requires substantial research. Property is also illiquid, meaning your money will be tied up for a considerable time and may be difficult or impossible to access on short notice. If urgent access is a necessity, you bear the risk of significant losses. 

If you’re looking for short-term opportunities, the stock market might be a better option for you. 

So, before making any investment decisions, consider:

• The level of risk you’re comfortable with

• Your personal liquidity needs

• The amount of capital you’ll need 

• How much you can afford to lose

• How long you’re willing to wait for a potential return on your investment  

Whether you’re looking for urban developments, opportunities in more rural areas, or even raw land, there are two main investment types to consider: residential and commercial real estate. 

Residential real estate investment options include single-family homes, condos, townhouses and multifamily residential up to four units. 

For both new construction and resale, residential property usually has a lower capital requirement than commercial real estate. Empty real estate costs money but there are fewer vacancy risks in the residential space, thanks to a fast-paced housing market driven by a high demand for homes. 

Investors also enjoy lower capital reserves and maintenance costs – taking out a home warranty can help alleviate any unforeseen repair commitments. However, there are some costs specific to residential properties that investors should consider, such as those from a homeowner’s association. Additionally, housing laws for rental properties vary by jurisdiction and are an important factor that should be considered prior to purchasing residential real estate. 

High-earning properties tend not to appreciate as much as properties that have less cash flow, and vice versa. This means investors typically have to choose between the potential for cash flow and appreciation. Any significant property repairs can also limit cash flow potential.  

Commercial real estate investment options include retail, office industrial, and multifamily residential of 5+ property units. 

Business properties usually have favorable, longer lease terms which could increase the likelihood of dependable long-term income. Plus, tenants are responsible for their own space and expenses, unburdening responsibility from investors. 

Another advantage of commercial real estate is the ability to cover borrowing costs. This is because the debt coverage ratio is based on property income rather than an individual’s earned income.

But commercial spaces like offices typically require a higher downpayment – 30-40% – than residential developments. ¹ 

There’s also a greater risk of vacancy – for example, if tenant businesses go bankrupt – meaning more time and money is required to source new occupants. Investors may have to maintain higher working capital to cover any substantial costs of repairs, too.  

While opportunities and risks can differ, many residential and commercial properties will face similar challenges. Zoning or building regulations could change, for example, adversely affecting your property values or income potential.

When considering real estate investment, there are multiple potential financing options available. You could use your own cash reserves or capital borrowed from a bank, for instance. If you’re looking to pool your resources, you could explore equity or debt crowdfunding which have a lower financial barrier to entry.

Investing personally in an individual property is the most active real estate investment. While there tends to be more personal risk, there’s typically more personal reward. But financing can be an issue if you don’t have enough cash reserves. 

There’s always the option of acquiring capital from a private lender, such as a bank. 

But consider the downpayment required, and whether you can cover future mortgage repayments and interest payments yourself. 

Using leverage, or loaned capital, also increases your exposure to a variety of risks. 

Speaking to a financial advisor can help you calculate costs, understand your borrowing requirements and discuss the risks associated with leveraged real estate investments.

Another financing option is crowdfunding, either through debt or equity, which is less financially demanding for investors and carries less risk. 

The main benefit is that you can commit a lower amount of capital, though these investments are typically illiquid and may be difficult or impossible to liquidate in a short time. 

So, if you don’t have enough funds to develop your own property portfolio, this could be the right option for you. 

There are multiple online platforms that facilitate this type of investment. 

Along with other investors you could invest your money into a capital investment – a physical property. Your shares in this investment have the potential to earn you future returns in the form of dividend payments. With debt investments – lending on property – you would earn back interest. 

Investing with a Real Estate Investment Group (REIG) – a business that buys, renovates, sells or finances residential properties – is different from investing individually because money is pooled between investors. This allows you to receive shares or interest in a property or several properties without trying to raise extra cash or obtain your own financing.

Real Estate Investment Trusts (REITs) are similar, but deal solely with commercial property such as offices, hotels, and shopping malls. You can invest by buying shares on the stock market with less of the risks that come with owning property directly. Since your investment is traded, it’s very liquid.  

For both REIGs and REITs, while risks and responsibilities are shared, individual investors have less say. If you’re looking to exercise more control and make key decisions, investing in your own property might be best for you.   

Issues at a global level can impact real estate investments in multiple ways. From urban emigration to onshoring, below are some of the global trends to consider. 

The excess demand for housing is outstripping supply globally and could become an opportunity for investors in residential real estate. But higher construction costs are trickling down to consumers, which could make buying a home even more unaffordable.  

Traditionally people have migrated to cities in pursuit of work and amenities, and this could continue to afford investors opportunities. 

But remote working is changing the landscape of commercial buildings, both the offices and retail outlets that serve office workers. Some businesses are looking to downsize or even vacate their premises. 

With less demand for office space, investors could face higher vacancy rates and costs. However, as companies relocate to more desirable locations, the property surplus could be transformed into residential real estate where demand outweighs supply. 

As people move to the suburbs and secondary cities or satellite towns – taking advantage of hybrid working – opportunities for development in these areas could also increase. However, it’s important to recognize that access to more urbanized and central locations remains important for many families and professionals.   

Extreme weather can have a big effect on property investment in the form of devaluation and repair costs. From hurricanes and severe flooding to persistent wildfire risks, the physical threat to property is increasing. 

Larger fluctuations in temperature also mean that some properties may require both heating and air-conditioning – even in places that historically required neither. 

Climate regulation and reporting standards continue to evolve, adding more pressure for businesses and investors to commit to net-zero targets. 

You may have to de-risk your assets in order to comply with new guidelines. This shift towards green energy will likely come at a cost, so keeping up to date with developments is key.

For instance, if you buy an old building, in the future you might have to renovate and retrofit the property to ensure it meets sustainability regulations. Even newer buildings may need more energy-efficient lighting and better insulation than before. 

The current political climate and subsequent market conditions could impact your investment. Recent conflicts in Eastern Europe and the Middle East will likely continue to impact the economy – exacerbating supply chain disruptions, driving up costs, and making it harder to sell or rent property units, for example. 

Finally, the trend towards increased “onshoring” or “nearshoring” – whereby businesses relocate operations from abroad to domestic premises – has the potential to negatively affect some of the biggest industrial hubs, such as China.