Question

Tony has been working as a Senior Analyst in an international investment bank for more than 7 years before quitting the job 2 years ago and joined as a Lecturer in Finance in a local university. Because of his strong background, he has been very successful in investing in hi-tech stocks during the last few years but unfortunately, some of his investments have done poorly in the last few months. In order to lock-in most of the profits he made in the last few years, and to diversify his investment portfolio, he is considering to team up with his best friend Patrick to invest in commercial and residential properties

discuss the advantages and disadvantages of diversifying to commercial and residential property investments from Tony’s point of view.(300words)

Answer 1

Advantages and Disadvantages of Investing in Commercial and Residential Property:

Here, we have to take the perspective of Tony who had been working as a Research Analyst for more than 7 years and he has a good knowledge about the investment and how to make portfolio of optimal risky asset so that even in bad times there will not be much loss.

But investing in Commercial Assets and Residential Property is a different thing, it requires huge amount of money and involves risk.

Some important factors which work as a constraint for investing in Commercial and Residential property:

• Long duration of vacancies in residential properties leads to loss of profit or we can say that revenue will be less as revenue in residential properties come from the number of occupancies, and it is common to have long duration of vacancies.
• Maintenance cost and upkeeping of commercial properties are very high, but if we consider residential properties it is less and simple than commercial properties.
• Thorough Research & Analysis required before entering into these types of investment. Because liquidity is very low, if we buy today any property we may not be able to sell at appropriate price even after a month.
• Now, If we talk about tax structure in this sector, there are very less incentives that are being provided by government.
• As investing into residential and commercial properties require huge amount of investment, finding fund is also very costly. Here if we take Tony's view, he and his friend may not be having much fund to invest in commercial properties, so they need to find Bank or any Financial institution to fund them and the funding in this sector is very costly, because period of loan is very high.
• Now lets talk about some advantages of investing in commercial properties, rentals are very high which means revenue streams will be good if the decision will be right.
• Regualr inflow of income, as these are rental properties, this may not be the case with residential properties, there may be some case when most of the properties they don't have customers, so loss is there with the revenue.
• Commercial properties are having longer duration of lease timing, that makes a regular flow of income.
• Most important thing is the Portfolio diversification, for which Tony is moving into this sector. There is a diversification of portfolio.

So this is about advantages and disadvantages of investment in Commercial and residential properties.