Risks of Real Estate

Real Estate Mkt

Many people find real estate to be a great investment. And when you consider the potential for current income or rents, it is easy to see why investors get enamored. Another trait that can be appealing is that it is tangible. Land, which is the only part of the property that appreciates in value, cannot be stolen, can’t burn down, and there is a very fixed supply of it.

Of course, as with any investment, there are risks as well. The structure - which can burn down - does not go up in value. In fact, you may claim “depreciation” on your tax return because the building is losing value over time. Tenants can also pose serious risks. Just knowing the building codes in your state can take serious attention. In my home state of Rhode Island, there are different standards for two-family buildings vs three or more. I would argue that there are more different types of risk associated with real estate than with any other investment.

You tax return will get more complex with a real estate investment as well. Most taxpayers who own rentals will use a schedule E to report income and expense, but in rare cases a schedule C may be more appropriate. The classification of expenses can be confusing so be sure to seek the counsel of a tax professional. And if you are selling a rental property, calculating your gain or loss for tax purposes can also very tricky.

They say that real estate is all about “location, location, location.” Many times, this is true, but in most cases, it is just like any other investment, it’s all about “timing, timing, timing.” When it comes to purchasing a home the timing part can be extremely difficult.  Unless you are buying your first home, you are typically simultaneously selling another, which puts you on both sides of the transaction – buying a new home and selling your old one. That’s why I try not to think about “timing the market” when buying a home. The focus should be on affordability and the readiness of you family. Owning a home is certainly a financial investment, but it is also inherently an emotional one as well.