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3. Real Estate

Why invest in Residential Real Estate?

Real estate is, in the most basic definition, tangible or "real" assets. It comes in many forms but most investors think of it in terms of their primary home. It also includes secondary homes, investment property (apartment buildings, commercial property), and sometimes publicly-traded REITs (Real Estate Investment Trusts).

The investment characteristics of real estate are as varied as the number and types of individual properties there are but here are the most common (excluding REITS, see next section):

1. They tend to be illiquid. This means that there is no ready-made market that will always purchase or offer it. In periods where there is a strong interest in real estate, it can be liquid. This, however, is very cyclical and it tends to be most diffcult to sell when it is most depressed in price.

2. It is tangible. This is obvious but, contrasted with financial assets, there is an investor preference for investments that can be seen and touched. It is hard to overstate the pricing power achieved by the ability to sell or buy something that is tangible and can sway the investor's pocketbook.

3. It is not efficient. In the most technical terms pricing on real estate is not efficient because of the lack of buyers or sellers for any one property. Contrasted with public securities, which may have billions of dollars flow through them each day from buyersand sellers all over the world, real estate will often get a small number of potential buyers from a very local area. This tends to distort the price in either direction, leading to huge differences in sales prices for similar properties. This some would argue is an advantage--the investor can exploit this mispricing.

4. It costs money to maintain. There are taxes due and maintenance required on every type of property annually.

5. Tax Advantaged. Most real estate, especially in the US, carries some tax deductions to encourage its purchase. Whether it be tax deduction of mortgage interest payed for a primary home or depreciation for commercial property or the almost unending deferment of capital gains taxes, this is a major advantage of real estate.