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INVESTING IN REAL ESTATE

Many of our clients either hold real estate investments when they come to us or opt to invest in real estate as part of their financial management plan. Many of these holdings produce income, while others yield significant tax benefits. There are numerous benefits to including real estate holdings in your financial plan, along with a number of risks. Here are some quick pros and cons to consider.

ADVANTAGES

  • Diversification – Because real estate investments have a relatively low performance correlation with common asset classes such as stocks and bonds, they present an attractive means to achieve diversification without sacrificing the potential for growth or security.
  • Real Estate is Tangible – Whether you’re flipping a single family home, buying an office building or investing in a Real Estate Investment Trust (REIT), the underlying asset is a piece of property that holds intrinsic value.
  • High Investment Returns – Recent decades have seen some returns in the approximate 10%-20% range for real estate, a trend which, despite a major correction, appears to continue in many cases.
  • High Yield, Low Risk – Many real estate investments are designed to provide monthly income. While residential rental properties can often return 1%-4% of the purchase price on average commercial properties are averaging approximately 6%-12%. These figures depend, of course, on the local market and particular circumstances of the real estate investments.
  • Hedge on Inflation – While there are many other factors at play during inflationary periods, real estate has proven to be an effective hedge.

Disadvantages

  • Slow, Costly Transactions – Sure, you can decide to sell at any time and for any reason. But the process of doing so is much more difficult and expensive than withdrawing your cash from the bank.
  • Management Costs – Every real estate investment requires some level of upkeep and many require management.
  • Cyclical Markets – Real estate is cyclical, both for the leasing market, which involves occupancy and rental income, and the investment market, which involves property availability and purchase prices.
  • Liability – If someone slips on an icy sidewalk, or leaves a bathroom sink overflowing, the liability will ultimately lie with the property owner.

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