There is almost no one that does not realize that there are investment possibilities using real estate. Some people will tell you that they invest in real estate because they own a home, and they expect it to increase in value over time. While historically real estate has, in fact, increased in value over time, there have been periods where that has not been the case. When it comes to our homes Abdo Romeo, we should only look at them secondarily as possible “hedges” against inflation, over the long haul, but primarily we should consider where we live to be our residences, and the places of habitation, where we live. For example, people who have purchased homes three to five years ago, have seen the market value of their houses fall. While most of us believe that will be “corrected” over time, it is important to stress that we should not look at our personal residences as short- term investments. Others have shied away from real estate investing because they felt they could not afford the amount necessary, while others have often improperly bought investments with the intention of “flipping” them in a relatively short period. There are numerous ways, in fact, that one can invest in real estate.
One of the most obvious methods of investment is to purchase a property or properties, and then rent them. Those considering this option must realize that there are risks involved, as well as positive possibilities. The positive possibilities include certain scenarios. One such scenario is buying a house or condominium at a very reasonable price, and being able to rent it out. In some situations, it is possible to generate a positive cash flow, meaning collecting more rent than the amount expended. One should remember however that there is also something known as the opportunity cost of money, which compares what might have been made if the money used, for example, for a down payment, were able to be invested elsewhere for a greater return. Another consideration should be the very real possibility that a tenant may either be slow in paying rent, or “skip out” completely, that the property go vacant for any period of time thus not bringing any money in while the owner still must pay the carrying charges, etc. In addition, one should figure in the wear and tear, insurance, utility costs, etc. Of course, the owner also gets certain tax advantages including such things as depreciation, cost deductions, and possible profits, as well as the possibility of the property appreciating in value over time. So, as you can see, like in most things, there are pros and cons in that scenario.
People using the above scenario should also make the decision whether they will be actively or passively owning this property. I advice speaking to a knowledgeable tax professional so that you fully understand the requirements of each.
Another way to invest in real estate is through a Real Estate Investment Trust (REIT) or as a partner in a Real Estate Limited Partnership. In both these cases, professionals manage the properties, and you are an investor. In most situations, your liability is limited to your initial investment. I recommend doing thorough due diligence on the general partner and/ or manager, as well as discussing all tax ramifications with a knowledgeable tax professional. Potential investors should always be vigilant and remember that there is no such thing as a “sure thing.”
Many people have done very well investing in real estate, while others have suffered financial losses. Real estate, like many other things, can often be a value portion of an overall investment strategy, when used in the right set of circumstances for the right person. Real estate is often not nearly as liquid as other forms of investment, so that should also be kept in mind.