Image courtesy of Forbes

Realities of Real Estate Investing


Barry Armstrong

Founder and President, Armstrong Advisory Group


Real estate has become a common investment vehicle over the past few decades.  Its global prominence has accelerated thanks to tycoons such as Donald Trump, a billionaire many times over who also happens to be the President of the United States.  In President Trump’s case, his humble start came in the way of owning and operating apartment buildings in the New York City borough of Queens.  It may be tempting to follow the lead of successful real estate investors like President Trump, but before you try to conquer the rough-and-tumble world of real estate, make sure you understand the realities of real estate investing.


REITs v. Direct Ownership


One of the primary realities of real estate investing is the fact that, unlike liquid investments such as stocks, bonds, and ETFs, many real estate investments are not liquid.  However, not all real estate investment vehicles require investors to lock up their money and throw away the key.  A real estate investment trust (REIT) may be a useful means to invest in real estate, maintain some liquidity, and potentially obtain high dividend yields.  According to the U.S. Securities and Exchange Commission, a REIT is a company that usually owns and operates income-producing real estate assets1.  Examples of these assets include office buildings, shopping malls, and hotels1.  One thing to remember is that only exchange traded REITs provide liquidity1.  Sales of non-exchange traded REITs on the open market do not occur readily and, for this reason, they are not liquid investments1.


While REITs provide opportunities to attain passive ownership stakes in real estate, the direct ownership and management of real estate provides investors with a chance to maintain more control of their investments.  However, direct ownership can be a capital-intensive undertaking and requires a certain level of available cash flow.  For this reason, direct ownership may carry many financial risks.  Real estate investors who flip houses to make a profit may run into unanticipated delays or costs that reduce or eliminate their anticipated return on investment.  Another example is the landlord who must deal with a tenant who fails to meet the obligations of their lease.  Although remedies may exist in each of these scenarios, they provide a sobering look at the potentially unfortunate realities of real estate investing.


The Bottom Line


Whether your real estate investment is your home or a mixed-use commercial property that houses hundreds of businesses, the fundamental principles are the same.  Never make an investment decision without fully understanding the risks of the investment.  Develop an understanding of the real estate market in your area, consider your level of cash flow, and always plan for the worst while hoping for the best.  Since a major downfall for many real estate investors is a lack of cash flow, an investor would be smart to sit down with a financial advisor to establish financial goals and determine whether the fiscal stamina to survive the tumultuous world of real estate exists.  A well-rounded investment strategy will always start with this important step.

Barry Armstrong has over 30 years of experience in the financial industry.  He founded the Armstrong Advisory Group in 2004 and has been sharing his financial knowledge with New Englanders on a daily basis during his Boston-based radio broadcast for nearly 20 years.  Learn more about Barry and the Armstrong Advisory Group at  Securities offered through Securities America, Inc.  Member FINRA/SIPC and Advisory Services offered through Securities America Advisors.  Barry Armstrong, Representative.  Representatives of Securities America do not offer tax advice.  Always seek the assistance of a tax professional familiar with the laws in your state.  Specific-sector investing such as real estate can be subject to different and greater risks than more diversified investments.  Declines in the value of real estate, economic conditions, property taxes, tax laws, and interest rates all present potential risks to real estate investments.  Armstrong Advisory Group and Securities America are unaffiliated.

March 2017