If you're like most, you have undoubtedly considered investing in real estate. Lately, I have heard countless individuals talk about building wealth by investing purely in land, renting homes, flipping houses, etc. And to be honest, the returns can be very exciting. After all, real estate has made many people very wealthy. On the flip side, it has also made many wealthy people file for bankruptcy. So how do you decide whether or not this is a good use of your time or not? The best approach is to look at what real estate has done historically and use that information to get a good idea of what it will likely do in the future.
The first topic to understand is the market itself. The "market" is composed of many sectors. Commodities, pharmaceuticals, utilities, precious metals, domestic, international, emerging countries, and the list goes on. Real estate is just one sector on the list of dozens. Think of it as one ingredient of a salsa recipe. Each of these sectors will expand and contract (grow and shrink). When the expansion last longer than normal, the contraction period is certain to be either longer or more severe as well. Real estate has been in an expansion period for a long time now. Therefore, it is reasonable to assume that it will soon experience a contraction. Many families can only afford to purchase one rental property, only to find that after taxes, repairs, and other expenses, the returns can be pretty lackluster. Others can afford multiple properties and make exceptional money, that is until the real estate sector takes a downturn, at which point they owe more than they can bring in. Remember this: There is no such thing as a return without risk. The bigger the return, the bigger the risk. There is no arguing with this, it is simply a fact. If you put all you have into real estate, your risk exposure is very high.
So if real estate is cyclical, then why not just time it right? Simply put, professional economists attempt to do this every day, and every day they get it wrong. They have been saying that we will get a recession for years now, but where is it? It is coming, we know that. But it's the 'when' that we can't foresee. If Ivy League-educated economists can't time it right, what makes us think we can? If you get in neck deep in real estate and don't time the downturn right, you're in for a really bad time!
Ever wonder why the world's greatest investors (Warren Buffet, Ray Dalio, Jack Vogle) don't ever recommend investing solely in real estate? Because they know research has proven there are better approaches. A well-diversified, properly managed portfolio will go through ups and downs too, but I have never heard of this approach causing anyone to file bankruptcy, and neither have you (unless you were lied to). This approach is how the majority of millionaires become millionaires.
In conclusion, should you invest in real estate? Absolutely! Let's just talk about using real estate with an appropriate and proven strategy.