Is investing in real estate still a good idea?

January 24, 2025  |  Scalable Capital
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Does investing in real estate pay off? In this article we examine the pros and cons, exploring possible alternatives such as real estate ETFs.

Why does investing in housing appeal so much?

Many people, having savings to spare, wonder whether the right choice is to invest in real estate by buying a house other than the one they live in, perhaps with the intention of renting it out and/or reselling it at a higher price.

In Italy, partly for cultural reasons, partly because of the wide availability of real estate, the house has a special value. Suffice it to say that in 2023, 75.2% of the population owned at least one house, one of the highest figures in the world. Moreover, more than one in five Italian households owns a second home (CasaDoxa Report, 2022). In our country, the idea that housing is one of the safe investments par excellence, a safe haven asset where one can invest even the largest part of one's savings, is particularly widespread.

'There is nothing safer than investing in bricks and mortar' is one of the favourite expressions of Italian investors, but is it really so? Buying a second home can be a good way to accumulate wealth and an option for those seeking long-term financial security, but it also entails a number of obligations, disadvantages and risks. In this article we will examine the pros and cons of investing in real estate, and discover alternatives for participating in the growth of the real estate market, such as investing in real estate funds or real estate ETFs.

Advantages and disadvantages of buying a house for investment purposes

Home ownership has a number of advantages, such as passive income when renting and possible capital gains over the purchase price. Let us delve into these aspects.

Advantages

  • Passive income: passive income can also be generated after the purchase of a house, e.g. if the house in question is rented out. This passive income has the added advantage of being predictable, which allows investors better financial planning.
  • Capital gain: the value of the property may increase over the years (e.g. in Italy, according to ISTAT, the price of housing in Q2 2024 increased by 3.2% over the previous quarter and by 2.9% in one year), generating a capital gain, i.e. the positive difference between the purchase price of the property and its current market price.
  • Potentially higher return: if the property is purchased at an affordable price and enhanced over time, the economic return can be high, especially in developing areas.
  • Personal or family use: the property can be made available to a child or used as a home for the family, ensuring a stable housing solution.
  • Emotional value and asset security: having a tangible asset such as a house can offer a feeling of stability and security, an important aspect for those who also see their investment as a future legacy.

Disadvantages

On the other hand, buying a second home as an investment also has some disadvantages, such as the need for considerable savings for the initial purchase or the risks inherent in this type of investment.

  • Need for a significant budget: investing in real estate requires the purchase of a house, usually through a mortgage loan and a down payment (usually about 20% of the value). This is an operation that requires considerable savings and a regular and stable income in order to be able to repay the mortgage instalments. In addition, the costs of maintaining a second home must be taken into account, such as service charges, municipal tax, maintenance and repairs, water, electricity, gas and other utilities, any apportionment, insurance or the mortgage itself.
  • Lack of diversification: by investing in a single property, you expose yourself to area-specific risks. For example, an increase in crime, the closure of large businesses or landmark shops, or a new infrastructure that makes the area less attractive (such as a freeway or a landfill site) can lower property values and reduce the attractiveness for tenants. As a reference, ISTAT reports that the average house price in Italy has fallen by more than 10 per cent since 2010. One of the main causes is the depopulation of small villages and the concentration of the population in the north and in large cities.
  • Other risks: both the purchase and sale of a property, as well as renting it out for investment purposes, are transactions involving risks, e.g. those arising from possible changes in the economic environment or the financial solvency of the owner or tenants. In Italy, more than one in three (39%) tenants had to face problems with defaulting landlords. This figure shows the importance of also considering the risk of arrears and the impact it could have on a direct real estate investment (source: Repubblica).

Investing in real estate with real estate ETFs

For those who do not have the means or the willingness to accept the risks involved in buying a property outright, there are alternatives to benefit from the growth of the property market, with reduced costs and no management commitments. Real estate ETFs (Exchange-Traded Funds) allow transparent and diversified investing, requiring less capital than buying real estate directly. These instruments may include among their activities companies specialised in real estate development and management, or even REITs (Real Estate Investment Trusts), real estate investment trusts operating on different types of properties. In Italy, the equivalent of REITs are SIIQs (Società di Investimento Immobiliare Quotata), which function in a similar way with the objective of making diversified and income-producing real estate investments accessible.

Investing in real estate can be an option for investors seeking passive income and long-term capital gains. However, one has to consider that this investment requires considerable initial capital and involves risks related to the future of the real estate market. Alternatives such as real estate ETFs offer access to the real estate market and the opportunity to take advantage of the sector's growth and profit generation without having to buy an actual property.

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Author Scalable Capital
Scalable Capital
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