Is investing in real estate right for you?

When you talk to people about their homes, many will tell you that their house is the biggest and best real estate investment they will ever make.

But you may have seen the most recent Charles Schwab advertisement that says, '' 'My house is worth a million,' is not a retirement plan."

Too many people view their homes as investment property. Is it really an investment if you do not intend to sell it and are not deriving any income from it?

Owning your home may, however, be a great start to real estate investing if, for example, you use equity in your home to purchase a residential rental property.

Investment property is generally purchased with the intent to earn income and possible tax benefits. Types of investment property include residential rental, commercial spaces consisting of retail and/or office space, and industrial property, which may be used as a warehouse or laboratory.

Investment property advantages

The biggest advantage to investment real estate is leverage, meaning you can obtain financing from a bank to make a large investment with only a small amount of cash up front.

Another advantage is having tenants pay the mortgage, taxes and operating costs of your building.

Over time, as your rental income pays down your bank loan, you not only gain equity in the property, you will ultimately own the building outright and have a continuous stream of income.

Many investors also realize various tax advantages through the purchase and sale of investment property, which they are able to utilize as part of an overall strategy with their entire investment portfolio.

Investment downsides

Depending on the type of investment property you purchase, it may require excessive property management, especially if it is an older property.

In addition, real estate is not as liquid as other types of investments, such as stocks, because real estate isn't traded on the open market. As a result, it could take some time to realize your equity between the time you decide to sell and the time you actually sell.

There are also inherent risks associated with real estate investments. Tenants may not pay on time or at all. And, it may take time to re-rent your property, which means any vacancies could deplete your expected profits, or worse, cause you to be unable to cover your expenses.

Another potential risk of buying and selling real estate is the failure to consult a real estate attorney prior to the purchase or sale.

A real estate attorney can add a lot of value to the transaction and may actually save you money by recognizing and addressing certain legal issues that you may not have noticed until it was too late.

Such issues may involve easements, zoning, tenant leases, and the transfer of title.

As a result, when you have made the decision to either purchase or sell real estate, it is advantageous to consult with an attorney who specializes in real estate transactions.

An attorney can assist you from start to finish by drafting and/or reviewing purchase contracts, property management contracts, tenant leases, title insurance commitments and closing documents.

Further, an attorney is able to advise you with complex tax deferred strategies known as 1031 Exchanges.

Certainly no investment is without risks, but with patience, time and professional guidance, real estate can be a rewarding and profitable investment.

Daniele St. Marie Thompson is an attorney with Murphy Desmond S.C.  She helps her clients with real estate and business
transactions.