Is it a good idea to invest in property?

Why is investing in housing an attractive option for some people?

Many people consider investing in rental property when they have money to spare, and wonder whether it makes sense to buy a property in addition to their main residence. This raises a number of questions, as ‘How much should you invest in property?’ or ‘Is now the right time to buy?’.

In Spain, investing through the purchase of a home is quite common: in 2023, investment in real estate assets in Spain stood at 5.7% of GDP, a percentage reported in the Bank of Spain's annual report on the sector. The analysis highlights the growing attractiveness of investment in rental housing, which is favoured by the boom in this type of housing solution among young people.

Buying a second home can be a way to build wealth and an option for those seeking long-term financial security, but it also carries with it a number of obligations, disadvantages and risks. In this article we will look at the pros and cons of investing in brick and mortar, as it is popularly known, and learn about alternatives to participate in the growth of the real estate market, such as investing in real estate ETFs.

Advantages and disadvantages of buying a home for investment purposes

Advantages

Home ownership offers a number of advantages, such as passive income and capital gains. Let’s go through some of them below.

Passive income

Once you have purchased a home, passive income can be generated, for example in the form of rent. This passive income has the additional advantage of being predictable, which allows investors to plan their finances more effectively.

Capital gain

The value of the property can increase over the years (f.e. in Spain, the price of housing increased by 7% in 2024), generating capital gain, i.e. the positive difference between the price at which we acquired the property and its current market price.

Disadvantages

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

Requires a significant budget

To invest in housing it is necessary to buy a house, usually through a mortgage loan and a down payment (commonly around 20% of the value). This is a transaction that requires considerable savings as well as a stable regular income. In addition, the cost of maintaining a second home must be taken into account, such as service fees, council tax, maintenance and repairs; water, electricity, gas and other utilities; possible apportionment; insurance, or the mortgage itself.

Risks

Both buying and selling a property, and renting it out for investment purposes are operations that involve risks, for example, those arising from possible changes in the economic environment or the financial solvency of the owner or their tenants.

Investing in real estate through real estate ETFs

For those who do not have the means or the willingness to accept these risks, there is an alternative way to benefit from the growth of the real estate market, at a lower cost and without the commitment that comes with buying a property, by investing through instruments such as ETFs (exchange traded funds) that offer a transparent and broadly diversified way of investing, and require less capital. Real estate ETFs include among their underlying assets companies engaged in the development and operation of real estate.

Besides ‘regular’ ETFs focused on real estate there are real estate-related service providers and real estate investment trusts (REITs), or Spanish Real Estate Investment Trusts (SOCIMIs), that you can invest in, which are usually involved in various (types of) properties.

REITs generate income by managing and owning real estate assets, which can be traded on the stock exchange. These are further classified into several subtypes. This type of investment allows the possibility of generating income through real estate, but without having to buy, manage or finance it. REITs are owners or lessors of all types of real estate (flats, hotels, offices, warehouses, etc.) and, by investing in an REIT, you are indirectly investing in the real estate assets owned by the fund. REITs pay out investors in the form of dividends or you profit through the increase of the value of the shares. One of the requirements to qualify as a REIT, for example, is the obligation to distribute the majority of its taxable income to its shareholders, usually a percentage of around 90%. It is also possible to invest in REITs through ETFs.

Investing in housing can be an option for investors seeking passive income and long-term capital gains. However, it must be considered that this investment requires considerable initial capital and involves risks associated with the future of the real estate market. Alternatives such as real estate ETFs offer access to the real estate market, and a possibility to take advantage of the sector's growth without having to purchase an actual property.