DRAWBACKS FOR REAL ESTATE INVESTING The most significant impediment to investing in real estate is illiquidity. Most real estate investing requires patience and a longer-term commitment to achieving a profit. Unlike stocks or bonds, which are traded daily, real estate takes time to liquidate and convert to cash. Another drawback to real estate investing is the market itself. While eco- nomic upswings can have a positive ef- fect on rents and property values, local or regional issues can result in a drop in value for specific neighborhoods. If an investor is overleveraged by carrying too much mortgage debt on individual properties, he or she could become stuck, unable to sell the property if values drop significantly. Most inves- tors realize this risk and balance their mortgage debt against current property values appropriately. FINAL VERDICT Real estate investing makes good sense to balance out an investor’s port- folio of stocks and bonds, mutual funds, and physical commodities. While real estate investing is generally accepted as an “alternative investment,” it can help investors hedge against wild stock market swings, provide appreciation and a steady income stream, and improve balance to an investment portfolio of securities and other physical assets. •
up. Although the Great Recession was somewhat of an anomaly, residential real estate prices continued to rise after 14 of the last 15 recessions.
to place a down payment on another income-producing or flip property. No matter their plan for the investment property, they have leveraged a fraction of the assets they already own to pur- chase additional assets, without having to come up with the full price of the property out of pocket. Flippers especially take advantage of this power of leverage. While most conventional mortgages require 20 percent down payment, many investors turn to alternative private lending to complete a transaction. With a private loan, an investor can leverage his or her existing assets, or the future value of the property to secure higher loan- to-value financing. Real estate flippers especially like utilizing private lenders, where they can obtain quick financing based on the future value of the property after it is renovated, and their track record of making profitable decisions. This option offers them the flexibility to put up less cash and leverage more of the asset’s value against the potential to make a profit.
INFLATION HEDGE During expanding economic condi- tions like we are experiencing now, de- mand for housing rises. When demand rises, rents and values rise along with it. In this respect, the correlation between GDP growth and real estate passes some of the inflationary pressure onto ten- ants, while generally retaining the pur- chasing power of the investor’s capital. LEVERAGING CAPITAL Most real estate investing offers the power of leverage. Other investments, such as stocks or bonds, require the in- vestor to pay the full value of the invest- ment, whereas with real estate a buyer can leverage his or her credit and assets to finance the investment strategy. Investors often obtain a second mort- gage on a property they already own
Kevin Kim is an experienced corporate and securities law attorney with Geraci Law Firm, dedicated to providing reliable and innovative legal solutions. Mr. Kim focuses
his practice on real estate matters, focusing on private placements and other alternative investments for private lenders, real estate developers, and other real estate entrepreneurs.
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