Article: Real Estate Risks

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Obviously we’re fans of real estate investment. It’s a tried-and-true form of commerce – almost a currency of its very own. It’s also an excellent component of any well-diversified portfolio. It tends to move inverse to much of the rest of the market, which makes it smart while also building volume.

That being said, like any form of wealth-building it carries with it some degree of risk. Though the risk is typically lower than penny stocks or even the wider stock market, there are several factors anyone thinking about getting into – or expanding in – the real estate market should keep in mind.

This www.dailyfinance.com article from last May lays out some of the risks very clearly.

Here are the high points:

Cash is necessary: To make a real estate purchase and have it count for anything- that is, not have a mortgage or lien attached – you need liquid cash. Not every beginning investor has that.

You’re still at the mercy of the market: Yes, real estate is a tangible thing you can see and improve, but that doesn’t mean you have control over interest rates, the housing market or the overall economy, all of which can affect your investment, for good and ill.

If you own outright, constant appreciation is a myth: Markets ebb and flow. The days of being to count on a 5 percent (or whatever) appreciation are largely over.

Also, from the article: lays out some of the risks very clearly.

The mortgage and taxes on a house do not disappear if you fail to rent it out for a period of time, or if it languishes on the market.

The pros at mint.com have an even plainer, more succinct analysis of several types of real estate investment, including sole ownership, partnerships and even publicly traded trusts. The big point:

Both articles take particular time to explore the option of partnerships, be it mutual ownership or an investor-developer relationship. The main takeaways are to button up your deal, most likely requiring the participation of a real estate attorney. Considerations include not only finances and paperwork but roles, as well.
From the mint.com article
“This eliminates disputes over who handles the problem if a major issue arises during a holiday or the Super Bowl.”
Good advice.