real estate as an
investing alternative
The stock market has become
the most common option in the world of investing but people are
always looking for solid alternatives. Some individuals are
looking to diversify their holdings while others are hoping
to achieve a better return on investment. Regardless of the
motive, many people are willing to try something new. Inevitably, a
significant percentage of this group ends up contemplating real estate
investments.
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cash! Real estate investments come in a variety of forms
ranging from single dwelling homes to commercial property. For
the purposes of this discussion we will narrow down our focus
and concentrate on 2 major real estate segments: domestic
rental homes and REITs. Investing in rental properties has become a fairly
common practice. The idea is to create an ongoing revenue
stream. Let's imagine that a home costs an individual $1000
per month to cover the mortgage, insurance, maintenance, and
any additional expenses. If he can rent that property out for
$1500 per month then this would provide him with an additional
$6,000 annually. The majority of time rental properties are
used as a means to supplement an income. However, there are
people who own several properties and rely on the rent as
their sole source of income. Although this investment strategy
can be successful it does have a number of potential drawbacks.
-
The risk of declining house values. If the so called
"housing bubble" bursts this could have a significant impact
on an investor's profits. To match the forces of supply and
demand an investor would need to lower the charge for
monthly rent. Unfortunately, the mortgage costs would remain
the same.
-
Potentially time intensive. As home owner, the
individual would be required to ensure that problems are
fixed as often as they might arise.
-
Potentially money intensive. An investor would also
be responsible to pay for any repairs to the home. (i.e. the
basement floods, or the roof leaks)
-
The tenants. It is wise to do a thorough amount of
screening before selecting your tenants; however, this will
not always eliminate a bad selection. In a worse case
scenario they could damage the property and/or neglect pay
the rent.
If you are somewhat intimated by this list of potential
pitfalls but you are still interested in the prospect of
investing in real estate, then perhaps a REIT (real estate
investment trust) would be worth investigating. These
investment alternatives are trusts that typically place money
in hotels, shopping centers, apartments, etc. These trusts can
produce some high dividends, however they are potentially
volatile due to the inherent nature of the industry. The
bottom line is that real estate investments have some nice
potential but they carry with them an above average amount of
risk. |
