Is real estate a good investment?

December 13, 2011

With market volatility and real estate prices where they are today, many are wondering, “Should I invest in real estate?”

 

Real estate can add dimension and diversification to a portfolio. It can provide an asset that should grow with inflation as the costs of materials increase; it can also provide an income stream that also overtime increases with inflation as a wages and the population grow. And, of course, when it comes to land we all know they aren’t making any more of it!

 

Before jumping in with two feet, keep in mind the following:

  • Prices can and may still drop. We’re at a point in many places in the county where prices are in line with historical averages. Keep in mind that “in line” doesn’t mean cheap. Prices may be turning the corner in some markets, but still haven’t in all. The key to a successful real estate investment is not necessarily the right property, but getting it at the right price.

  • Rents can and may drop. Lower prices mean investors can make a profit by purchasing properties and offering lower rent to high quality renters. It may be deceptive to look at what a renter is paying today, as they may be able to shop around for something better tomorrow. 

  • There can be plenty of costs. Repairs, replacement, advertising, and lost rent can be large costs that need to be considered.

  • Don’t assume you’ll get a happy renter. Another cost is that of having to deal with never satisfied or otherwise time consuming renters.

 

And finally, make sure you’ve got plenty of cash. You should increase your regular emergency fund by about six to twelve months of expenses to cover things like vacancy, major replacements, etc.

 

A more efficient way for many to invest in real estate is by adding a real estate mutual fund to your portfolio that invests in Real Estate Investment Trusts (REITs). These publicly traded investments allow investors to receive many of the characteristics of real estate investing, without the headaches.

 

The preceding blog was originally published by the Financial Planning Association®(FPA®). To view the original blog please visit the FPA Web site

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