Investing in Real Estate

Goodness is the only investment that never fails. - Henry David Thoreau

Real estate investing is the investment of money or capital in order to gain profitable returns, as interest, income, or appreciation in value. While many "experts" offer us advice on how we should invest our money, most people limit their investments to whatever choices are available to them in their individual retirement accounts. Typical retirement accounts generally contain a mix of stocks and bonds, some even some cash. You can invest in stocks and bonds by buying them individually or by buying them as part of a mutual fund. A mutual fund is simply a collection of stocks, or bonds, or cash equivalents or sometimes a mixture of all three. People also invest in "hard assets" like real estate or gold, but most often these are not available choices for the average person's retirement account.

Many investors believe that their retirement account will provide them with an investment where they simply cannot lose money. This is a false assumption because currently there is no fail-safe way to invest in anything without some risk. Every investment requires each individual investor to consider the risk potential versus the profit potential and match it with their level of comfort.

THE ADVANTAGES OF REAL ESTATE

The party line is that stocks historically have outperformed all other investment plans.

- Jim Cramer

The bulk of the world's assets are in real estate and explains why some of the brightest, influential, and some of the most wealthy people realize that there is an advantage to investing in real estate. Investing in real estate provides the opportunity to purchase high value assets with a potential to also generate high profits.

Real estate investing is much easier to finance than any other investment product. Investing in other assets require you to have a substantial down payment or the full purchase price to obtain that asset. Real estate investing only requires a fraction of the purchase price such as a 5%, 10% or 20% down payment. This fact alone enables us to purchase real estate much easier than many other types of products for the same value

Leverage - or the ability to borrow based on the value of the property. This advantage can be used to "cash-out" and use our equity to purchase other investments, or the equity alone can be used as collateral for other investments. This is one of the principles that makes real estate such a valuable investment strategy.

Tax Shelters - Few investments offer the amount of tax benefits that can be captured with real estate. Some of these tax benefits include: mortgage interest payments, depreciation on rental properties, 1031 Exchange to transfer equity from one property to another tax free, and self-directed IRA which allow you to use tax sheltered money for real estate investing. Few investments have the same tax sheltering ability that real estate offers.

Appreciation and Income - Real estate can offer both appreciation and income on the same transaction. There will be an equity gain in the property if it is rented, as the tenant is paying down the mortgage.

If the transaction is structured properly, the rent payment should cover expenses on the property. Any additional will also provide a residual income stream. Depending on the stage of the market cycle, the property may be appreciating in value. So, not only are we gaining the equity as the mortgage balance is paid down, but we are also gaining equity as the property appreciates in value.

THE DISADVANTAGES OF REAL ESTATE

There are some disadvantages of investing in real estate investing that should also be noted. The biggest disadvantage in real estate is that it is a non-liquid investment and generates expenses for routine maintenance and taxes. Our most recent economic meltdown magnified another disadvantage which is that there is no guarantee that home values will maintain their value as the economy fluctuates.

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