Many investors at some point or another consider adding real estate to their portfolio, and for good reason. Real estate investments can help diversify investment portfolios while creating long-term cash flow. Here are six questions to ask yourself before investing in real estate to help you make the right investment choice. 

How will real estate affect your overall portfolio?

Real estate investments can be great for diversifying your portfolio. If most of your investments are in the public market – stocks, bonds, etc., adding investments that in the private market, like real estate, can be a smart addition. Take a look at your portfolio and talk to your financial advisor to understand how real estate investments will affect your overall portfolio.

What’s your risk tolerance?

All investments involve risks, and real estate investments are no different. However, there are varying degrees of risks. For example, renovating and flipping a property will involve more risk than acquiring a shopping center with historically stable cash flow. Knowing your risk tolerance will help you decide what kind of real estate investment is the best fit for you.

Do you want a more hands-on investment or a passive investment?

How involved do you want to be with the day-to-day operations of the property? Different property types will involve different levels of maintenance and regular responsibilities. If you are interested in passive income and your budget allows, consider hiring a property manager

How important is the liquidity of your investments?

It’s important to note that real estate investments tend to be less liquid than other types of investments. Many investors think of their real estate investments as long-term plays creating consistent cash flow. Keep in mind real estate investment can tie up your cash and typically can’t be sold in one day, like stocks, if you need money. As you pursue real estate investing, consider your liquidity needs and investing timeline.

What kind of property do you want to invest in?

While commercial real estate is a category of its own, there are several types of properties you can invest in. From hotels to shopping centers to warehouses, each property type has varying levels of responsibilities and returns. Take time to research the different property types, the responsibilities you as the owner will have, and their potential returns. If possible, talk to other real estate investors about their experiences with various types of properties to get a better understanding of what it could look like for you.

What are the potential tax benefits?

Both active and passive real estate investments can have potential tax benefits. Programs like the 1031 Exchange and Opportunity Zone Program have tax benefits for investors. Working with your real estate agent and financial advisor you can determine what tax benefits are available to you.

As you consider your answers to these questions, feel free to reach out to our team to see what properties fit your investment plans.

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