Chapter 6.3, Problem 4R

To determine

To analyze: The advantage and disadvantage of investing in real estate.

Explanation of Solution

Advantage of investing in real estate:

1. Real estate can be easier to understand

When a person starts investing, it can be difficult to comprehend what needs to be known to make a profit. Many forms of investment depend upon abstract principles and complex algorithms, which are particularly difficult to understand.

Real estate, on the other hand, requires the purchase of physical property and, to some degree, most people are familiar with real estate. Investing in real estate can be much easier to grasp than complex investments made by mathematicians.

Disadvantage of investing in real estate:

1. Real Estate Has Higher Transaction Costs

When buying shares of a stock, trading costs are very low, sometimes just a few dollars. However, when buying real estate, the trading costs are significantly higher.

Unlike other forms of investment, the cost of real estate purchases can greatly affect the valuation of the investment and make it even harder to earn a profit.