Real estate investment can be an excellent way to diversify a portfolio. There are many opportunities to invest in real estate, from residential properties to commercial buildings. The different market conditions for each type of real estate should be taken into consideration, with proper research done before purchasing. Located in New York, Craig Nassi, an entrepreneur and CEO of BCN Development, explores the risks and rewards of real estate investment, pinpointing some of the costly errors that novice investors can make.
Diversity is Key
Putting your money in any one category of investment is unwise. Balancing your portfolio between real estate, stocks, savings, brokerage accounts, and cryptocurrency takes practice. Be sure to heed the words of your financial advisor when you are just starting out. Real estate can provide an important balance to your portfolio and bring you many different advantages. If purchased at the wrong time, real estate can also be a costly drain on your savings.
Choices for Real Estate Investment
When you invest in real estate, you have the choice of investing directly by purchasing a property or investing in a real estate investment trust. Investment trusts give you the advantages of real estate investment without the trouble and expense of managing and maintaining the property yourself.
Advantages of Real Estate Investment
Real estate can pay for itself through rents and leases. If these factors are carefully balanced with a loan on the property, real estate can be an excellent investment. The value of the property may also increase due to appreciation. These factors provide short-term and long-term profits.
Real estate investments are less volatile than other types, including stocks and cryptocurrencies. Real estate values generally fluctuate along with the economy as a whole, but in many locations such as Manhattan, rents have steadily grown even while the economy has been in flux.
Ability to Leverage Your Purchase
Craig Nassi explains that when you own real estate, it is possible to mortgage it or to take out loans on the principal. With the money received from loans, you can improve the property and raise the sales or rental price in the future. It is possible to make money from loans as well. If your net income is larger than the costs of the loan, that equals money in your pocket.
Real estate investment has several advantageous tax provisions. Depreciation can be accounted for, and interest expenses can be deducted. Capital gains taxes can also be deferred when the proceeds of a sale are invested in another property. Other tax programs include incentives for property developers or owners that build low-income housing.
State and Federal programs also offer incentives for building or investing in economically disadvantaged areas. These programs are not available to people who put money into any other type of investment.
Disadvantages Outlined by Craig Nassi
No Protection from Losses
Unlike stocks and bank accounts, which are insured Federally, there are no similar provisions for real estate losses. There is no protection from unscrupulous or fraudulent sales, and there is no hedge against loss. The market price alone can determine whether you will recoup any of your investment. You may not be able to cover all of your expenses, including taxes, operating expenses, and insurance. You may also find that you can’t sell the property at or above the level you bought it for.
Risk of Financing
Financing a property through a mortgage presents its own specific risks, explains Craig Nassi. Before property owners can see any net cash flow, they must pay the loan. Loan agreements are often written to favor the lender, with provisions to impound the cash flow if something goes wrong. This does not account for problems caused by tenants.
Dependence on Tenants
When you own a rental or leased property, it is crucial to keep an eye on your tenants and make sure that they are properly maintaining the building and following up on all of their responsibilities. You will need to make sure that they make payments on time as well.
Difficult to Sell Quickly
If you need liquid cash, real estate may not be the right kind of investment for you. Consider investing in a trust instead. Properties may be difficult to sell even if market conditions are favorable. When you are holding onto an unwanted property, you will still need to pay all of the property’s expenses.
Balance the Risks and Rewards
Before making any real estate investment, it is wise to do your due diligence and explore every angle of the purchase. Craig Nassi recommends that all potential real estate investors make a complete survey of the risks and rewards before making an investment.