Five Pitfalls of Real Estate Investing You Should Know

2. It’s A Leverage Investment

Plain and simple, a leveraged investment is using borrowed money to invest, and crossing your fingers for an even bigger return. Here’s the thing: when leverage works, you multiply your winnings. But when it doesn’t, it’s doubly bad: You magnify your losses. 2008 wasn’t that long ago. Remember when home values dropped to crazy lows? Some borrowers ended upside down: their mortgage balances were over and above what their homes were worth.

Leverage isn’t inherently good or bad. But it’s risky. Are you comfortable taking on extra risk with your hard-earned dollars?

3. It Limits Your Diversification Ability

First, take a look at your assets. How much do you have set aside for retirement? What about for extra investing, education plans, contingency funds? How much additional cash are you bringing in each month that you can put towards saving?

Now answer this: how much are you willing to cut out of higher-priority investing to dump into a real estate deal? People who tend to invest in seductive real estate propositions put a disproportionate amount of their wealth in real estate. All the excitement can easily cause a concentrated, leveraged bet in real estate.

Every individual should be investing according to the asset allocation that is right for them based on their goals, risk tolerance, and time horizon. If you own your own home and have 5% of your portfolio dedicated to real estate investment trusts (REITs) via mutual funds, you have plenty of real estate exposure. Don’t make real estate an inadvertent concentrated bet.

2 of 3

Leave a Reply

Your email address will not be published. Required fields are marked *