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Real Estate

Hi, my name is Matt Daley.

In this episode of the Financial Success Academy, I'll be discussing real estate and how it might fit into your overall portfolio.

One of the most common questions we get revolves around the topic of real estate and whether or not it's a good investment. The most honest answer we can give is, "it depends."

Let's first start by establishing that real estate can mean a lot of different things. Some of the most common ways people invest in real estate are long-term rental homes or apartments, short-term vacation rentals like Airbnb and VRBO, fixing up and flipping residential homes or apartments, buying raw undeveloped land, and private and public real estate investment trusts.

Now that we've established that real estate can mean lots of different things, let's discuss how it could fit into your overall financial picture. In general, we are fans of real estate and believe it can be a valuable wealth-building tool. It can provide both short-term and long-term benefits like cash flow, appreciation, and tax benefits like depreciation and favorable capital gain treatment upon selling. However, it's essential to understand the risks and considerations of investing in real estate before making any investment decisions. Like any investment, real estate comes with risks.

Here are some risks that you should consider before investing in real estate. The first is market risk. Real estate values can be impacted by outside market factors such as changes in interest rates, economic conditions, and demand for housing. If these factors change, the value of your property could decrease.

There's also liquidity risk. Real estate is a relatively illiquid asset, meaning that it can take time to sell a property if you need to raise cash quickly. This can be a problem if you need to access your investment quickly or if you're unable to find a buyer.

Also, cash flow risk: rental income can be affected by factors such as vacancy rates, rent levels, and maintenance costs. If your property is not generating enough cash flow to cover your expenses, you may be forced to sell the property or find other sources of funding.

There's also property-specific risks. Each property comes with its own set of risks, such as environmental issues, tidal problems, and zoning restrictions. These risks can impact the value and potential return on your investment.

You should also consider management risk. If you own rental property, you will be responsible for managing the property and dealing with tenants. If you're unable to manage the property effectively, you risk losing tenants and generating less rental income.

There's also regulatory risk. Real estate is subject to a variety of local and federal regulations, which can impact the value and potential return on your investment. Changes in regulations or zoning laws can impact the ability to develop or use the property.

It's important to consider these risks before investing in real estate and to have a comprehensive risk management plan in place. This plan could include strategies for managing risks, such as maintaining an adequate emergency fund, conducting thorough due diligence before investing, and working with experienced professionals like real estate agents, attorneys, and property managers.

One of the most common mistakes we've seen is when clients have converted their primary residence into a rental property. There are several considerations associated with this decision, but the greatest potential issue is forfeiting your capital gain exclusion of up to $250,000 for a single tax filer and $500,000 for a married filing jointly filer.

We do not have time in this video to go into all the details, but if you have questions about this topic or anything else associated with real estate, please reach out. We'll do our best to help you.

Thanks for tuning in. And as always, stay safe.