Is Investing in Real Estate Still Wise?

With a tumultuous housing market and economy as a whole, you may be wondering if real estate is still a good investment. As part of a long-term investment strategy it is still an investment that is considered to build wealth. The dip in the price of homes and other pieces of real estate may mean that you have the opportunity to earn an even greater return. Because you can buy real estate now at bargain pricing, you may be able to earn more of a profit when you sell it later, when the real estate market returns to normal.

Fellow finance writer Rayce Banner answers the question, "Is Real Estate Investing Still Evergreen?"

Investing in real estate is another time-tested method for building wealth. Over the generations, real estate owners and investors have enjoyed rates of return, comparable to the stock market. The best place to start with real estate ownership is to buy your own home. The equity, which is the difference between the market value of the home and the loan owed on it, in your home that builds over the years can become a significant part of your net worth. Among other things, this equity can be tapped to help finance other important financial goals such as retirement, college and starting or buying a business.

In addition to building wealth through home ownership, you can also consider investing in real estate that you rent out, often referred to as investment property. If you wish to invest directly in real estate, residential housing (such as single-family homes or small multiunit buildings) is a straightforward and attractive investment for most people.

Before you venture into real estate investing, be sure that you have sufficient time to devote to it. Also be careful not to sacrifice contributions to taxdeductible retirement accounts in order to own investment real estate.In the early years of rental property ownership, many investors find that their property's expenses exceed its income. This "negative cash flow" can siphon off money that you could otherwise direct into your retirement accounts to earn tax benefits. When selecting real estate for investment purposes, remember that local economic growth is the fuel for demand for housing.

In addition to a vibrant and diverse job base, a limited supply of both housing and land on which to build is another factor that you should take into consideration. When you identify potential properties in which you might invest, run the numbers to understand the cash demands of owning the property and the likely profitability.

If you don't desire to be a landlord (one of the biggest drawbacks of investment real estate) consider investing in real estate through real estateinvestment trusts. REITs are diversified real estate investment companies that purchase and manage rental real estate for investors. You can invest in REITs either through purchasing them directly on the major stock exchanges or through a real estate mutual fund that invests in numerous REITs. Because REITs tend to pay fairly healthy dividends, it's best to avoid investing in them outside of tax-sheltered retirement accounts during your working years or if you're in a high tax bracket.

Most diversified U.S. stock mutual funds invest a small portion of their assets in REITs. If you'd like REIT-focused mutual funds, among better such funds are Fidelity Real Estate, Cohen & Steers Realty Shares and Vanguard REIT Index.

Rayce Banner is a freelance writer on financial topics. Check out the learning "game" that has had a huge positive impact on his career direction: http://www.best-online-golf-game.com/cash-flow-game.html.