Have you ever found yourself talking with a financial planner about real estate? I have on many occasions both in private sessions and at seminars. In most cases planners have many reasons why real estate is an under-performing investment. Usually the topic of diversification is brought up and sometimes the word speculation is mentioned.
Don’t get me wrong, I believe many financial planners can be quite helpful in building a financial plan and in presenting the investment choices that they know and understand. The wrinkle seems to be that there are so many ways to really invest and planners tend to focus on investments that they are most familiar with and perhaps where they can make the most money. In my opinion real estate can be a great investment, especially if you understand the fundamentals of what makes for a good real estate investment.
A common fallacy that I hear is that cash flow and appreciation are the only elements in a real estate return. It is then further stated that appreciation is unlikely and should not be considered which only leaves cash flow. Reality is that cash flow and appreciation are just two out of the four elements that make up a real estate return.
4 parts to any real estate return
Cash flow – important but not necessarily the most important part of the return
Tax Savings – paper losses can offset ordinary income
Equity Buildup – someone else pays down the principle
Appreciation – something we hope for these days
These four elements do make up any rental properties return, but once again there is much more to investing. Money can be made at the time of purchase. Money can be lost when unforeseen structural or environmental problems are discovered after purchase. Money can be made when after purchase the city council rezones the area.
It’s more than numbers
My point is that there is more to real estate investing than simply numbers. The numbers are very important because they shed light on what you might expect as a return on your investment, but the numbers fail to express the other factors that can impact your return as well.
Do you suppose that population growth in an area might impact real estate returns? What about the job market? Do you suppose that environmental regulations or land use laws might impact real estate? What about zoning, school districts, soil conditions or even weather?
Some things are very much in an investor’s control which is one of the reasons many like to invest in real estate. Quickly clear, is there are some things that are beyond any investor’s control and must be minimized at time of purchase.
BawldGuy Here: I’ll be writing a post this week on how almost any real estate investment woulda been vastly superior to almost anything on Wall Street. I’ll be using the investment period, 1975-2005 as the example period. Nothin’ like using history to demonstrate what’s what.
Related posts:
- The Real Estate Investor’s Ceaseless Search For Ever Higher Returns
- Real Estate Investors – Never-Ending Search For Higher Returns – Some Facts
- Is Your Real Estate Investment Broker Like a Nordstrom’s Sales Guy?
- Real Estate Investor Paradox: Great Returns Don’t Require Great Investments
- Real Estate Investment: Real Leverage is Using a Big Enough Stick
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