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Just as every form of investment has advantages, it also has disadvantages. This is as true of real estate as of any other choice. In fact, some of the advantages listed in the preceding section have a corresponding disadvantage. You should be aware of these features of a particular investment before deciding to proceed with an investment program, whether you are considering stocks, real estate, a combination, or some other product.

In real estate, one of the most significant disadvantages is the long-term cost of buying property. Mortgage payments have to be made every month, even when property is vacant or when tenants are late with the rent. In the earlier years of along-term mortgage, the majority of the monthly payment goes to interest. This cost is far higher than most people realize. For example, if you borrow $100,000 and finance your investment with a 30-year loan at 6.25 percent, your monthly payment will be $615.72. Over the full term of the loan, your payments will add up to $221,659.20, more than twice the amount you borrowed. So the “real cost” of buying that property has to take interest into account.

The true cost of your home comes into focus when you also consider how long it takes to pay down the principal balance of the mortgage. The 6.25 percent loan will be less than 7 percent paid off at the end of the fifth year; the rest of the payments are all interest. In fact, it takes 21 years to pay off one-half of the entire mortgage. Because of the way that interest is calculated each month (based on the outstanding loan balance) the amount you owe declines very slowly at first, and only gradually accelerates in the last 10 years of the 30-year period.

Even when tenants cover the cost of financing rental income property, the true cost is significant. It is quite possible and even likely that the impressive gains in market value over many years will go primarily to interest payments.