Are You Holding Your Breath? -- how investing in real estate fits into a financial plan

You may have noticed that none of my posts discuss “investing” in real estate. If you are waiting for a post on this topic I will politely tell you not to hold your breath. Buying and selling individual real estate properties for rental or “flipping” purposes is one topic I won’t be talking about.

Don’t get me wrong. As I will discuss in a later post, I strongly believe that everyone should own the real estate they live in – your house, condo, or trailer if that is what floats your boat. I also believe that a diversified real estate product such as Real Estate Investment Trusts (REITs), are an important part of any investment portfolio. Buying individual properties in an attempt to make money, however, is, in my opinion, an occupation not investing. A whole different animal that requires a whole different skill set. I am not knocking it (ok maybe just a little), it is just something I don’t do. If you are looking for “hot” real estate tips you have come to the wrong place.

I don’t invest in real estate because, frankly, I find it too much like work. Owning individual investment properties requires securing/retaining tenants (dealing with the inevitable vacancies and deadbeats) and maintaining/improving the property (I struggle enough with keeping my own house in order!). If you are going to “invest” in individual real estate properties you need to make sure that you are competent in these two areas – and that you enjoy that line of work.

There are additional risks related to investing in individual real estate properties such as concentration risk (putting all you eggs in one basket) and illiquidity (can’t get the cash out quickly). Additionally, such investments almost always involve leverage (debt). While leverage can provide better returns when values are rising, it works against you when values fall. Most of you weren’t around to remember how real estate prices crashed in the 1980s. Not to worry, you are likely to see that soon. As the October 11, 2006 Forbes article, “Where to Worry About Real Estate” notes, “Everyone knows the housing market is slowing; the question is how fast and how painfully.”[1]

For those of you that think there is free money to be had in real estate, I suggest you do your homework carefully. You will hear and read many stories about how someone made a fortune in real estate. You don’t hear, however, about the fortunes lost. The last real estate bust caused Donald Trump to declare bankruptcy in 1990. The Donald may have recovered personally but many of his creditors did not. To add further insult to injury, the Trump Hotels & Casino Resorts sought voluntary bankruptcy protection in 2005. Investing in real estate is not for amateurs. You might start doing your homework by reading The Key to Getting Stated in Real Estate Investing (Know Your Risks) by Dr. Steve Sjuggerud http://www.investmentu.com/realestateinvestmentadvice.html#key and “The real estate B.S. artist detection checklist” by John T. Reed. http://www.johntreed.com/BSchecklist.html


[1] http://www.forbes.com/home/realestate/2006/10/10/housing-bubble-metros-life-re-cx_tvr_1011restate.html