Tuesday, 13 March 2012

Investing in Real Estate: Overview

For anyone who regularly reads this blog they will know that, currently, my largest single investment is a rental property which I bought in 2010. I have decided to do a series of posts outlining the various things I learned during the research / search / purchase / ownership phase of investing in real estate.

The first thing to know is that you do not have to buy an investment property to get exposure to the real estate market. This is because there are enough listed REITs (real estate investment trusts) out there so that you can invest in one through the stock market. Often they come with the added benefit of trading at a discount to their market value. This is a separate class of investment which I will cover at a later point.

First we need to consider the reasons why an investor would consider investing in physical real estate. In my opinion it comes down to several reasons

  1. Banks will loan you more against real estate (at reasonable rates without things like margin calls etc) than any other investment class.

  2. Control - some investors like being able to actually alter the outcome of their investments. Real estate is about as hands on as you can get without actually owning and running a business of your own

  3. Psychological benefit of a lack of a liquid market. A lot of investors get very 'antsy' when their investments are losing money. This is especially true in the stock market when one can check exactly how much money they have made / lost every minute of every day. For some investors there is a real benefit of their money being in an investment that they do not know the value of but they believe will appreciate in the long term. I think this is an underestimated benefit of real estate investment

However there are many myths that circulate about real estate investment and it all depends on how the market is going. In Australia there is a belief that you can never lose money through real estate investment and in the long run property prices will always increase. In markets where the real estate market is depressed like the US there is a view that real estate is inherently risky and you can lose your shirt through real estate investments.

My idea behind this series of posts is to strip away a lot of the hype (both positive and negative) and hopefully provide an objective view of real estate investment and how it can fit within an investors portfolio.

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