Investing in real estate has the potential to be a stabilizing force in one’s investments and one’s life. This is especially the case when real estate is owned over a long time period because it is more able to maintain value after downtrends in market conditions. Homes can provide physical and mental security as well as financial strength through steady appreciation over time. Avoiding poor investment decisions is still concern with real estate as with any other investment, but the risk is usually lower because of the significant trends favoring real estate.
There are a number of ways to invest in real estate including real estate stocks, mutual funds and investment groups. These methods may complicate one’s investment goals but also have the potential to be more profitable. Either way, a sound real estate investment that takes into account typical real estate pitfalls has a strong chance of being a fruitful investment both personally and financially.
The United States Census Bureau’s historical homeownership statistics indicate homeownership in the United States has ranged between 64%-68% since 1965. Since, the population rate has increased every year since then, more and more homes have consistently been purchased in the United States for the last 42 years.
What this means is that housing demand is for the most part steady based on historical trends. Thus, if homeowners and buyers are able to avoid the typical pitfalls associated with homeownership, real estate in the form of homes can add stability to an investment portfolio, especially in the long-term.
In addition to being a fairly stable long-term investment, money put into a house or property is also more secure than securities investments such as stocks. Since land values and property values tend to appreciate with time, this can often cause home value appreciation on top of the capital one pays off through a mortgage. What’s more if homes and other real estate do depreciate, they don’t often depreciate by massive amounts.
How to avoid real estate pitfalls
There are a few ways real estate investments can depreciate and/or lose value, and one might want to consider these things before jumping into a real estate investment head first.
• Location
An area that has been experiencing massive job losses, economic stagnation, and loss of a major industry can realistically expect the possibility of falling house prices if not other economic stimulus exist. The opposite effect tends to occur when new industries and businesses move into an area.
• Time
Real estate held for a short period of time is more vulnerable to volatility in price movements. The housing bubble and bubble burst of the 2000’s are examples of price volatility that can happen to real estate with a holding period as long as a several years.
• Market conditions
If the supply of homes are high and the economy is weak, price appreciation will likely take longer than in times of higher demand and economic prosperity.
• Political Instability
If one is investing in real estate in a political ‘hot zone’ i.e. an area that is prone to political instability, this may have a negative effect on home valuations because political tensions may ripple into the national or local economy.
• Price
The price one buys a home at is important. Just like any investment, buying at the peak of a housing boom, at an overly inflated price may spell loss if one is not careful. Houses like all investments do require research and prudence.
• Age and Condition
Just as some cars can be ‘lemons’ i.e. about to fall apart, so too can homes. Buying a home that needs a lot of restoration should ideally be negotiated into the price of the home through a discount. Investing in Real Estate through Mutual Funds, Stocks Real Estate Groups:
Ways to invest in real estate
There are many ways to invest in real estate each of which has its own unique trends, potential problems and advantages. One may invest directly in different types of real estate be it land, commercial or residential.
Alternatively, one may invest through what is known as a real estate investment group which is when a number of investors come together and pool their money to purchase large properties for rent or resale. Also, one may purchase stocks of real estate housing companies or mutual funds that diversify their investment through managed ownership of many housing stocks.
All of these methods may prove fruitful in the long-term if chosen well. As the type of investment becomes more complicated, so too do the potential problems such a joint ownership insolvency, bad property management of one’s investment etc.
With all the above methods, one has less control over the investment but may still use such investments as a diversification tool because they are all in the real estate sector. If held over the long term, the balancing and growth effects of diversifying through real estate in stocks, investment groups or mutual funds can balance and appreciate one’s investment portfolio.
Sources:
1. http://bit.ly/cyMO8w (OFHEO.gov)
2. http://bit.ly/ahatG8 (Census.gov)