Many individuals invest in real estate, even if just buying a home.  As

the old saying goes, your home is “the biggest investment youll

ever make.”  Hopefully this will not be the case, but for many

people their home is the only asset they have as they near

retirement.  In the past the standard practice when retiring was to

sell the big family house and move into an inexpensive condo, using

Real estate investing is a bit different from simply buying a home.

Income from real estate investing typically takes the form of either

rental income or capital appreciation.  In either case a great deal

of knowledge is needed about the real estate markets and home values

in the area.  To quote another old saying, “All real estate is

local.”

Looking at the risks and returns of real estate investing, investing in

paid-for real estate, where there is no mortgage, is less risky than

individual stock investing and more risky than buying income

securities.  The return will also lag behind individual stock

investing and the hassle factor is much larger.  Real estate markets,

As many have discovered recently buying real estate with a mortgage can

be very risky.  For years it was generally accepted that the price of

houses always went up.  Taking out a mortgage was therefore seen as

safe as long as nothing happened to ones income stream such that she

Buying real estate with a mortgage, however, involves a substantial amount

of what is known as “leverage.”  This is the use of a little bit

of money to control something much more valuable.  When the value of

the thing increases, one is able to make huge profits due to the

large value of the thing being controlled.  For example, if one buys

a $500,000 house for cash and the value of the property increases by

$5000, or 1%, one only makes 1%.  If one puts $500 down on a $500,000

house, however, and the value of the home increases by $5,000, one

During boom times, this meant that an individual could make huge profits by

buying and selling houses, and there were many individuals who used

the available no-money-down loans to speculate, buying several homes

at a time with interest only loans.  The trouble is that leverage

cuts both ways.  If that $500,000 home goes down just 10% in price,

suddenly one has lost $50,000 on what seemed to be a $500 investment.

Couple this with a loan that one could barely afford in the first

place for which the payments increase after an initial introductory

period, and you have the housing crisis in which we currently reside.

For the small investor, buying real estate with mortgages, other than

ones home, is far too risky.  Adding some real estate to a portfolio

once it is large enough to pay cash for properties (say a $500,000 portfolio) can be very useful.

The advantages are that they provide a steady source of income

through rents, and the appreciation should at least keep pace with

inflation.  Again, if one buys in the right markets or finds

properties that are selling at a bargain, one can even beat

The second advantage is that real estate does not tend to be correlated

with the movements of other investments (2008 excepted).  This means

that the price and rental income received from the properties usually

moves independently of the prices and returns of other assets.  This

adds protection to a portfolio since when your stocks are down your

As with buying individual stocks, one will tend to do better buying

individual properties, particularly if one has the knowledge to

select the good properties.  This requires a substantial amount of

time and energy, however, since the properties must be found and all

of the activities required when buying or selling a house must be

performed (including paying all of those various people who have

their hands out when a house changes hands).  In addition, if renting

one must deal with tenants who may decide to not pay the rent, trash

For those not wanting to deal with individual properties, Real Estate

Investment Trusts, or (REITs), may be the solution.  These are

similar to mutual funds, in that the funds of individuals are pooled

together to purchase a set of properties.  The holders of the REITs

then receive a share of the rent and appreciation income.  Like a

mutual fund, the price of the REIT will increase or decrease

depending on the return, value of the properties held, and other

factors.  The main disadvantage is that the fees paid to the

administrators of the REIT will eat into profits.

Your investing questions are wanted.  Please send to vtsioriginal@yahoo.com or leave in a comment.

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Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.