Money invested in real estate, for income and capital growth, grants stable and expected returns, parallel to bonds. Like other investment option, this too, has certain threats attached to it. Following are the elementary factors affecting the value of a particular property.
Location: The location of a building is a important factor in determining its market price. A property investment is likely to be held for some years and the attractiveness of a given location may change over the holding period. As such, part of a city may be undergoing regeneration, in this case the perception of the location is likely to improve. In contrast, a shopping center development may affect the appeal of an existing residential property.
Physical characteristics: The type and utility of the building will affect its value. Utility refers to the benefits an occupier gets from using the building. The risk factor is depreciation.
Tenant credit risk: The value of a building is a function of the rental income that you can expect to receive from owning it. If the tenant defaults, the owner loses the rental income. However, it is not just the risk of outright default that matters.
Lease length : The length of lease is an important consideration. If a building is let to a good tenant for a long period then the rental income is assured. This is one of the attractive features of property investment. It is important to consider the length of lease.
Liquidity: All property investment is relatively illiquid to most bonds and equities. Property is slow to transact in normal market conditions. In poor market conditions, it will take even longer to find a buyer. There is a high cost of error involved.
Tax implications: Apart from income tax, which is to be paid on rental income and capital gains, there are two more levies to be borne by the investor — property tax and stamp duty. These levies vary from state to state and can effect on investment returns.
High cost of investment: Real estate values are high with respect to other forms of investment. This puts it out of reach of the common people.
Risk of single property : Purchasing a single property exposes the investor to definite risks related with the property and does not provide any profit of diversification.
Official issues: While stock exchanges promise to a certain extent, the legitimacy of a trade in equities or bonds and thus protect against bad delivery or fake and forged shares, no parallel safety net is offered here.