Investing in individual pieces of real estate has made a lot of headlines lately, but many people have discovered that this is not the perfect investment opportunity that these articles make it out to be. Individual pieces of real estate are currently believed to be undervalued, making it an ideal time to buy and hold real estate according to many experts.
Unfortunately, holding on to real estate comes with a lot of risk that the typical investor is not usually prepared for. Maintenance costs with single family homes and apartment buildings have proved to be the undoing of many real estate investors. A lot of people simply assume that maintenance costs will be similar to their primary residence.
In fact, a tenant can cost a landlord a lot more. Tenants tend to not keep up with general repairs, and often let minor issues progress without reporting them. In the case of an eviction, an investor has to contend with both a loss of rent money and the threat of vandalism. Expect appliances to wear out faster and cosmetic items such as carpets and paint, to need replacement more often.
Professional property management companies are usually experienced with mitigating these costs, but for an individual investor the cost of one of these management teams will often eat through any profits seen by the property.
What to do Instead
Instead, investors who want to include real estate in their portfolio should look at REITs that are available through a self-directed 401(k) or IRA. These funds invest in a large variety of real estate, including single family homes, apartment buildings, and commercial buildings. This minimizes the risk of being overexposed in one market and reduces the risk of vandalism or other property damage. Furthermore, there are many tax advantages to these accounts, making them an ideal choice for many investors.