Investing in Real Estate: Surveying Your Options - dummies

Investing in Real Estate: Surveying Your Options

By Eric Tyson

Investing in real estate is a time-tested method for building wealth. Over the generations, real estate owners and investors have enjoyed rates of return comparable to the stock market, so don’t let the real estate market slide that happened in many areas in the late 2000s deter you from examining and using real estate to grow your nest egg and accomplish your personal and financial goals.

The best place to start with real estate ownership is to buy your own home. The equity (the difference between the market value of the home and loan you owe on it) that builds over the years can become a significant part of your net worth. You can tap in to this equity to help you accomplish other important financial goals, such as retirement, college, and starting or buying a business, among other things.

In addition to building wealth through home ownership, you can consider investing in real estate that you rent out, often referred to as investment property. If you don’t want to be a landlord — one of the biggest drawbacks of investment real estate — consider investing in real estate through real estate investment trusts (REITs). REITs are diversified real estate investment companies that purchase and manage rental real estate for investors. You can invest in REITs either by purchasing them directly on the major stock exchanges or through a real estate mutual fund that invests in numerous REITs.

If you want to invest directly in real estate, then residential housing, such as single-family homes or small multi-unit buildings, is a straightforward and attractive investment for most people. But before you venture into real estate investing, make sure you have sufficient time to devote to it. Also be careful not to sacrifice contributions to tax-deductible retirement accounts in order to own investment real estate. In the early years of rental property ownership, many investors find that their property’s expenses exceed its income. This “negative cash flow” can siphon off money that you could otherwise direct into your retirement accounts to earn tax benefits.

Novice real estate investors often make the mistake of not thoroughly researching the income and expense realities of properties before buying them. Inexperienced landlords also make mistakes when trying to rent their properties and end up with more vacancies and headaches than they expected. Thus, the early years of rental property ownership can be filled with unexpected losses, which, in the worst cases, have bankrupted owners who already were stretched thin because of the initial purchase price.

When selecting real estate for investment purposes, remember that local economic growth is the fuel for demand for housing. In addition to a vibrant and diverse job base, a limited supply of both housing and land on which to build is another factor you should take into consideration. When you identify potential properties in which you might invest, run the numbers to understand the cash demands of owning the property and the likely profitability.