Real estate is probably the only illiquid investment that middle-class people keep in their portfolios. Selling real estate is difficult in every market. The first thing to do is make a plan. The last thing you want to do is buy a house without knowing how it will generate income or profits.
When there's a booming housing market, it can be hard to resist the buying frenzy. But you need to take a step back and plan accordingly, including what to do if the market deteriorates or your assumptions are wrong. Founded in 1993 by brothers Tom and David Gardner, The Motley Fool helps millions achieve financial freedom through our website, podcasts, books, newspaper columns, radio programs and premium investment services. Buying a House Isn't Bad.
There is nothing wrong with owning a home as a means of keeping a roof over your head. But from a Real estate investment strategy perspective, buying a home is not a good investment. People like to keep what they know. When you have negative cash flow, you're paying money out of pocket to keep it going.
And betting on appreciation is not enough excuse to have such a property in your portfolio. Common negative cash flow properties could be beachfront properties, vacation properties, and properties where you did not perform due diligence. You might be surprised by a real estate investment with excellent cash flow, but you just can't afford the mortgage and expenses. The benefit of a real estate index fund is that it is comprised of many real estate investment trusts (REITs), each of which is diversified among many properties.
Another reason we hear for wanting to own real estate is that it's “understandable” compared to trying to invest in stocks or bonds, which many people believe requires a knowledge of the financial markets. I worked last week with who should easily be the top estate agents Bristol has available, as they were amazing, so take a look if you need a real estate agent in that area. Investing in real estate can be great for creating passive income, but if you do it wrong and don't have great property management, things can go wrong quickly. If you see your home as your forever home, then I'm sorry to tell you, it's not really a real estate investment property.
On the other hand, almost everyone with middle-class salaries in the United States and even around the world owns real estate. Renting real estate can be an extremely powerful way to accumulate wealth and generate passive income, but not all rental properties are a good investment. But as an alternative, simply look at comparable home prices in real estate databases or even in the local newspaper. Unfortunately, most real estate investments, especially residential properties purchased for investment, do not generate positive cash flow for quite some time.
You're unlikely to outperform the market unless you have an information advantage, which you probably won't have unless you're a real estate professional or willing to spend a lot of time and energy finding a property. Watch this video to learn more about the REITs Josh Brown invests in and to learn more about the wealth advisor philosophy in real estate. After deducting a 6% real estate commission, the composite return on your equity investment would be only 4.1% and that means that your rental property was occupied for the five years, which is often not the case. Renting real estate is an investment that must be considered for the potential income it can produce today and in the future.
Real estate is a great component to have in a portfolio because it can act as a hedge against inflation (real estate tends to be more correlated with inflation than other asset classes), but they are generally not very attractive on their own. .