The Risks and Benefits of Investing in Property

Regardless of how you typically invest your money, including real estate in your portfolio offers solid profit potential in exchange for fairly low risk. That said, this kind of investment involves a lot of moving parts, so much so that real estate warrants a unique classification compared to other assets. This means that with all the benefits come additional complications that you won’t find in other assets.

Depending on the size of your portfolio, experts will often recommend that you devote up to 30% of that to real estate investments. The reasoning here is that, on average, the demand for real estate is pretty dependable, giving it a level of consistency that is hard to find in other investment opportunities like the stock market. The cyclical nature of property value fluctuation is unique compared to other types of investments and can help you make an educated guess as to how it will perform. This relative predictability that real estate enjoys is a stark contrast to the dramatic peaks and valleys you can find in the stock market.

As the real estate owner, you have far more control over its profitability than is possible with your other investments. You have the option to improve the property by making repairs or upgrades that also make it more desirable and valuable if you ever want to sell it. Additionally, these improvements will allow you to rent it for more money as well in the short term, providing a nice boost to your monthly cash flow. Finally, many of the expenses you incur on the property – such as interest on loans – is tax deductible, creating even more passive value for the investor.

Now that you know the benefits, there are a few risks to keep in mind when dealing with real estate.

You need to watch out for a few costs that can take you by surprise if you’re not careful, such as the fees associated with initial purchase of the property. Additionally, if you plan to rent to any tenants you will probably have to enlist a management company – taking on that task yourself can be difficult – and that can chip into your profits.

Furthermore, as opposed to other investments – like annuities, stocks and bonds – purchasing real estate is a fairly complex process. Also, simply finding the right real estate opportunity may require months of your time and, even when you finally put in an offer on that perfect property, the current owner could refuse or counteroffer.

Finally, it’s important to understand the local market before purchasing real estate, and technical factors such as regulations can vary drastically by location. Do you know what community property states are? If you’re married it pays to know, because in the event of a divorce it could cost you half of your property investment. Other things to look out for include zoning laws that open up the potential for overdevelopment as well as an unstable market history that can make shifting property value an issue. All this is to say that, though unique, it is important to treat real estate as a serious investment and do your due diligence.