Some financial advisers may view real estate as an important element of an investment portfolio. For many individuals, it is one of the main elements. Many investors tend to choose real estate over other investments because they are more familiar with real estate. Real estate is not limited to owning a home though. It includes raw land, residential, commercial and industrial property. An investor may own real estate through a corporation, individually, jointly with a partner, through a limited partnership or through a Real Estate Investment Trust (REIT). As with most investments, there are advantages and disadvantages of investing in real estate.
What are Some Advantages of Investing in Real Estate?
Leverage
Most of the time, lenders will lend the majority of cash to a buyer because the loan can be secured with the property itself. Typically, real estate loans are greater than the maximum margin requirement for stocks. This gives investors more leverage and the possibility of higher returns on funds invested.
Inflation
Investing in real estate can serve as a hedge against inflation. There is a relatively strong correlation between real estate values and inflation, especially when inflation rises. When inflation is low, real estate will typically rise at a rate higher than inflation. Specific regional factors can cause properties in some parts of the country to appreciate at higher rates than those in other parts of the country.
Taxes
Not only does an investor have the opportunity to earn capital gains on the sale of real estate, investors can receive tax deductions for operating expenses, depreciation of the buildings, and interest expenses on loans. However, these could be subject to tax limitations. It is best to check with a C.P.A. when selling property.
Cash Flow
Renting the property can provide supplemental income to the owner.
Psychological
As with a home, some investors prefer to own real estate because of the security it provides. Real estate is something tangible that can be marketed or sold. It is oftentimes viewed as a cushion or something to fall back on.
What are Some Disadvantages Of Investing in Real Estate?
Illiquidity
Perhaps the biggest disadvantage of owning real estate as an investment is its illiquidity. When an investor decides to sell real estate, it may not easily be converted to cash. Stocks, bonds, and mutual funds can easily be sold in the market; however, it could take years for real estate to sell.
Taxes
Tax law changes cannot be anticipated easily. Changes in tax laws can affect risk and returns of real estate investments.
Economic
There is no guarantee that a piece of real estate will increase in value. The money tied up in real estate will not be available for investments, such as stocks, that may have the potential to provide stronger growth.
Management/Maintenance
Real estate owners are responsible for maintenance of the property, if someone else is not hired to handle such tasks as accounting, marketing and maintenance. These activities can take up a lot of time and can be a considerable expense.
Cash Outlay
Although the majority of an initial investment amount can be loaned to an investor, typically, an investor must make a significant dollar contribution for the initial investment, and often can be responsible for the total amount of the investment.
What Do We Recommend?
Henssler Financial does not buy real estate investments for our managed client portfolios; however, there is nothing inherently wrong with owning real estate as an investment. As all of our clients have heard before, we follow the Ten Year Rule. Our philosophy is that any money you need within 10 years should be invested in fixed-income securities, and any money that you will not need within 10 years should be invested in high quality, individual common stocks or mutual funds that invest in common stocks. By holding fixed-income securities to cover 10 years worth of liquidity needs, you should not need to sell stocks during a period of lower stock prices.
Instead of buying real estate investments, we prefer to buy high quality, individual common stocks, or mutual funds that invest in common stocks, for assets that should be in growth investments. We buy bonds, laddered out for 10 years, for assets that should be in fixed. For more information regarding this topic, please contact Henssler Financial at 770-429-9166 or experts@henssler.com.
Disclosures:
This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
