For some investors, real estate is a complement to a diversified portfolio of stocks and bonds. It offers a potential hedge against inflation that is unique and has attractive tax benefits as a bonus.
However, as witnessed during the financial meltdown beginning in 2008, real estate investments can prove a disaster when property values collapse and families and businesses are strapped for cash.
Real estate falls into a special class of assets called hard assets, which typically are good hedges against inflation.
Inflation is a rise in the cost of goods and services with a corresponding decrease in the value of money.
Other examples of hard assets include gold and other precious metals. Hard assets appreciate during periods of high inflation as nervous investors drive up prices.
Real estate has a permanence that attracts investors, especially when inflation pushes rents and market prices up. Consult a qualified tax advisor to help you determine the tax benefits (if any) of a potential real estate investment.
However, don't conclude that real estate prices only go up, because that's not the case. In periods of slow economic growth, real estate prices stall and even decline. Like most investments, real estate works best as a long-term commitment.
Real estate is a local investment. This means the real estate market may be good in one city and depressed in another city, depending on local economic conditions.
National economic factors do affect real estate values, such as interest rates (when they go up, it becomes harder for potential buyers to qualify for loans).
Real estate markets in urban areas are more volatile than those in smaller communities and rural areas. The lesson for prospective real estate investors is be prepared for cycles of depressed property values, which are not good times to sell investment property (but may be opportunities to buy for investors with deep financial reserves).
You should have the financial resources to hold on through difficult times. If you must have a constantly rising market to make your investment work, you may want to rethink whether you have the financial resources for real estate investing.
Unlike securities, real estate has holding costs, such as taxes, utilities, payment on loans, and so on.
You can usually sell stocks quickly (at a loss, if necessary) if you need cash immediately.
Because real estate is illiquid (hard to sell in a hurry) don't even think about investing if you don't have at least six months of cash to cover your personal expenses and the carrying cost of real estate investments.
