Permit me to clarify the title of this piece. I'm not suggesting that real estate is something we should avoid because I think it's a lost cause. Instead, I'd like to draw your attention to the practice of speculative real estate "investing." I use quotation marks there because if you're speculating on something, whether real estate, stocks, or baseball cards, in many senses you're not really investing.
The National Association of Realtors (NAR) recently released the results of a study, finding that of all homes sold in 2004, some 23% were bought as investments. That can be fine -- building wealth via real estate is something that can be and has been accomplished by many. But it's easier said than done. If you're planning to buy, fix up, and then sell in short order, lots of things can go wrong:
- Fixing up can take much longer and cost much more than you expected. Good contractors are not always easy to find and they tend to have a lot on their plates at all times.
- Things change, even in the short term. Interest rates might surge, making people less interested in buying the property you're selling. Home prices might plunge, especially if they'd been rising rapidly recently. Neighborhoods change, too. If a liquor store opens across the street from your property, your number of potential buyers has just shrunk.
- Being a landlord, if that's your plan, has its own set of dangers. I wrote about this topic a while ago, offering some cautions. Fool readers then wrote in, offering their own advice.
Long-term investing in real estate is a more conservative approach, and it may even be the one practiced by most. The NAR has found that just 3% of those who buy homes sell them within a year. Another study, cited by a U.S. Newswire story, found that in 2002, the typical owner of a second home had owned it for nine years.
So what should you do? Proceed with caution. And consider alternatives. There is always the stock market, for example. And within it, you can even invest in real estate, such as via real estate investment trusts (REITs). If you're looking for some attractive REITs that offer significant dividends and the potential for appreciation, grab a free trial of our Income Investor newsletter. It will let you see which REITs (and other income-producing securities) have been recommended, as well as offering some new ideas backed up by research.
One of Income Investor's first recommendations, for example, was iStarFinancial
Learn more in these Fool articles:
Find out more about buying, selling, and maintaining a home in our Home Center, which also features special mortgage rates. Also, visit our Building/Maintaining a Home or Buying or Selling a Home discussion boards, to get some great insights and tips from fellow Fools.
Longtime Fool contributor Selena Maranjian does not own shares of any companies mentioned in this article.