Real Estate as an Investment
By: Elizabeth Silvestri, CFP^®
The Henssler Financial Group Position Paper

Leverage
Most of the time, lenders will lend the majority of cash to a buyer because the loan can be secured with the property itself. Typically, real estate loans are greater than the maximum margin requirement for stocks. This gives investors more leverage and the possibility of higher returns on funds invested.

Inflation
Investing in real estate can serve as a hedge against inflation. There is a relatively strong correlation between real estate values and inflation, especially when inflation rises. When inflation is low, real estate will typically rise at a rate higher than inflation. Specific regional factors can cause properties in some parts of the country to appreciate at higher rates than those in other parts of the country.

Taxes
Not only does an investor have the opportunity to earn capital gains on the sale of real estate, investors can receive tax deductions for operating expenses, depreciation of the buildings, and interest expenses on loans. However, these could be subject to tax limitations, so, check with a C.P.A. when selling property.

Cash Flow
Renting the property can provide supplemental income to the owner.

Psychological
As with a home, some investors prefer to own real estate because of the security it provides. Real estate is something tangible that can be marketed or sold. It is oftentimes viewed as a cushion, or something to fall back on.

Illiquidity
Perhaps the biggest disadvantage of owning real estate as an investment is its illiquidity. When an investor decides to sell real estate, it may not easily be converted to cash. Stocks, bonds, and mutual funds can easily be sold in the market; however, it could take years for real estate to sell.

Taxes
Tax law changes cannot be anticipated easily. Changes in tax laws can affect risk and returns of real estate investments.

Economic
There is no guarantee that a piece of real estate will increase in value. The money tied up in real estate will not be available for investments, such as stocks, that may have the potential to provide stronger growth.

Management/Maintenance
Real estate owners are responsible for maintenance of the property, if someone else is not hired to handle such tasks as accounting, marketing, and maintenance. These activities can take up a lot of time and can be a considerable expense.

Cash Outlay
Although the majority of an initial investment amount can be loaned to an investor, typically, an investor must make a significant dollar contribution for the initial investment, and often can be responsible for the total amount of the investment.