Real estate can also be used as an investment vehicle. Except in very hot real estate market, buying property tends to be a lower risk investment. Accordingly, the rate of return (ROR) associated with real estate is generally lower than that associated with stocks and bonds. But, this may be okay with you depending on your investment objectives. Real estate is not at all a liquid investment, but may not be hard to liquidate depending on where your property is located. Be aware that the process of cashing in on real estate usually involves selling that property, and that the sales process may take considerable time and money to accomplish. For example, if you are selling your real estate through a realtor (a real estate broker), know that realtors will generally charge the seller (you!) between 3% and 6% of the sales price you gain in exchange for your property in commissions.
The primary factor in real estate valuation is location. Real estate in a good location is worth more than real estate in a bad location. Many factors go into making one area a "better" location than another. Proximity to a city, good schools, low crime, access to parks and wooded areas, etc. are all attributes that contribute to making a property valuable.
Apart from location, there are other factors that you need to consider when investing in real estate. For example, you must consider whether it makes more sense to purchase commercial or residential real estate (or both). You need to understand how long you will need to hold on to the property before it stands a chance of rising in value. You need to understand the costs of maintaining the property. You need to understand how taxes work with regard to property you want to buy, and how taxes will change depending on what sort of construction you may conduct. You need to understand the zoning laws that govern your property and make sure that your intended use of the property is legal. If you will be renting the property, you need to understand what is involved in being a landlord in the community where you have purchased property. There are, in fact, many factors to consider when purchasing property. It is wise to consult with real estate professionals, including real estate brokers and/or attorneys, and you accountant too before making any decisions to purchase property.
Real Estate Investment Trusts
There is a simpler way to invest in real estate than buying and selling property directly. A Real Estate Investment Trust (REIT) is an investment group that offers shares in real estate ownership and/or loans using real estate as collateral. REITs offer investors many benefits:
- Professional management oversees the operation of the business
- More liquid and higher ROR than individual real estate ownership
- Investors can invest with less money since they are not buying property on their own
If you decide that a REIT is a good match for your portfolio, be sure to diversify your holdings. With REITs, diversification means investing in properties in various parts of the country and in different types of properties (i.e., residential, commercial, multi-unit, etc). REITs also offer special tax considerations that allow investors to avoid being taxed twice; once on income and then again for property tax.