Q. My wife and I max out our IRAs and 401(k) accounts each year and still have cash to invest. It is better to put it in a taxable brokerage account or use it as a down payment and start investing in real estate?
A.Real estate should be a part of every diversified investment portfolio. However, owning investment properties directly may not be the right strategy for everyone. Becoming a successful landlord requires many skills, such as doing financial analysis on available properties, screening potential tenants, overseeing contractors, and understanding real estate and business law, just to name a few. Hiring a property manager can make it easier to own an investment property, but can also reduce its profitability.
If you (or an investing partner) have in-depth knowledge about real estate, then buying investment property can be a profitable endeavor. But if not, I recommend using extreme caution. A common pitfall is drastically underestimating the annual cost of owning and maintaining a property and overestimating the potential rent income.
If you don’t have the time to research and manage real estate on your own, consider investing in a real estate investment trust or REIT. Shares of these securities may be bought and sold on the major exchanges, just like a stock, or through a mutual fund that specializes in real estate.
REITs invest in mortgages or various types of real estate, such as hotels, office buildings, vacation properties, and shopping malls. Investing in a REIT gives you a way to own real estate that’s generally more simple and liquid than purchasing an investment property on your own. You get many of the same benefits, but with less financial risk.
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