Chartered Financial Analyst (CFA) Practice Exam Level 2

Which of the following is a disadvantage of direct real estate investment?

1. High liquidity

2. Geographical diversification opportunity

3. Low transaction costs

4. Higher cost of acquiring information

The correct answer is: Higher cost of acquiring information

Direct real estate investment involves purchasing physical properties, and one of the inherent challenges of this approach is the significant cost associated with acquiring necessary information. This includes market research, property appraisals, zoning regulations, and various legal considerations. Investors must conduct thorough due diligence to understand the specific property and its market dynamics. The resources required for this process can lead to higher costs, making it a disadvantage compared to other investment vehicles, such as publicly traded securities, which often have readily available information and analysis from various sources. The other options highlight advantages or characteristics of direct real estate investment. High liquidity is generally not associated with real estate, as properties can take time to sell. Geographical diversification can be achieved through various investments, but it becomes challenging when dealing with localized real estate markets, as there are limits to how diversified one can be in property investments without incurring additional costs. Lastly, low transaction costs are not typical of real estate investments, as they often involve significant expenses related to legal fees, commissions, and maintenance. Thus, the correct choice emphasizes the financial burden related to information acquisition in direct real estate investments.