Real Estate Investing: Risk and Rewards
We spend a lot of time at Zbuyer focusing on the needs of real estate agents who are seeking motivated sellers. That is, to use a cliché, our bread and butter. But interwoven among the many buyers, sellers and, yes, agents that we communicate with every day are a particular subset of the population: real estate investors.
Anyone with any mind for investing knows that diversification is important, and most experts advise that real estate is an important part of any sustainable portfolio. But, unlike mutual funds and bonds, it’s not often immediately successful to the novice (or even average) investor. Sure there are ways to invest in real estate-heavy portfolios, but actually BUYING a property takes opportunity, cash… and a strong stomach.
Here are a few risks and rewards for those just starting out in the real estate investing game:
Rising interest rates
With interest rates on a steady – if slow – increase, borrowing to fund property investments is a less attractive option. Particularly for those who may invest in Real Estate Investment Trusts (REITs) – a more hands-off approach to real estate investment – these periods of rising rates can dampen returns.
This AOL Finance article has a nice, succinct breakdown of risks involved in direct, private and REIT property investing.
A very clear risk-reward curve
We don’t have the space here to properly summarize this article from Crowd Street .Well, we do, it’s the Internet, but they do it so much better. The upshot: For those with the fortitude, experience and opportunity to make a risky, leveraged investment, the payoff can be significant – and quick – in a manner that the stock market just can’t provide.
Actually purchasing a house or apartment complex or commercial property is only the beginning. There’s insurance, taxes, maintenance, city codes, advertising, tenant turnover and a million other expenses that can pop up at moment’s notice. And that’s if things are going well – natural disasters or even just a particularly frigid winter can lead to costs you didn’t see coming.
Rental property CAN be a beautiful cash cow, but you still gotta feed her.
This is the name of the game – very few investors make their living SOLELY on real estate ownership, but it sure can be a primary source of income and, perhaps more importantly, a hedge against things like inflation, yo-yoing interest rates and stock market dips that could affect your other long-term investments. Because the reward-to-portfolio risk ratio in real estate is somewhat higher for real estate, increasing there could allow you to take things a bit more conservatively in the stock market. Having options is never a bad thing.
Investopedia has a nice rundown of the risks and rewards: Here
The operative word in “real estate” is “real.” With real estate you’re making an investment in something that exists outside of the ticker on the bottom of the Bloomberg channel. Sure, you can turn it over to a property management company, but you could also get to work repairing it, decorating it and flipping it to make your return on investment. Improving a property could help improve a neighborhood or community that needed a shot in the arm. Heck, you could even LIVE in this investment.
So, while it’s important to be as dispassionate as possible about your portfolio, real estate does provide a connection to the real world, our communities, and our passions. And that’s never a bad thing.
We’ll be trying to post more frequent articles on the topic of real estate investing, and we want to hear from you! What are the issues, questions or suggestions you have from your work in this area? Shoot us an e-mail at firstname.lastname@example.org and let us know!