Real Estate Funds: A Comprehensive Guide to Investing

Investing in real estate funds became popular in the beginning of the twenty-first century. The practice first involved commercial real estate securities investments, which essentially meant purchasing the underlying assets on large pieces of real estate intended to be rented out. However, the development of Real Estate Investment Trusts (REITs) lead to more speculation in residential real estate, including the popularization of house "flipping." When the real estate bubble burst in 2006 and 2007, many began to question the viability of continuing with this type of investment. Few doubt there is money to be made, but many wonder if the risks are worth the reward.

The Crisis of "Over Housing"

Part of what many economists see as the problem leading to the 2006-2007 real estate collapse is often called "over housing." For example, when John McCain ran for President in 2008, many critics pointed to the fact his family owned eight houses to allege he was part of the problem with the American real estate market. Not only do many individuals own multiple homes, but many who may not be qualified to own a home were able to purchase one through incentives. The result was too many houses, simply put, to be in line with a sustainable market demand.

Volatility in Real Estate Bubbles

With an excess of housing and ease in achieving loans, many people think that real estate is a sure bet investment. They begin to speculate on markets in areas such as Florida, Las Vegas or California. These areas were some of the hardest hit in the real estate crises. The reason the areas were hard hit was because of the bubble effect in home prices. While home valued in the more stable areas of the Midwest fell only slightly, home value in areas where speculation falsely inflated prices dropped sharply.

Tax Incentives for Continued Investment

Despite the fact so many have lost money investing in real estate, there are still incentives to go take the risk. One incentive is a tax break. When you own a home, you can claim more deductions on your taxes. For example, if you own a home that you rent out a portion of the year, you can deduct expenses in repairing or maintaining that home. This type of incentive can make it more tax friendly to own a home than to own a comparable amount of stock.

Earnings and Reward Potential

When you invest in a home, you have an actual asset to call your own. Even if the value of the asset drops, there is a floor to how far it can drop. The cost of the home's parts, including land, brick and mortar, hardware and appliances, will always be a constant real asset. This means, even though the asset may drop in value temporarily, there is always a chance it can regain its worth. The result of this phenomenon leads many to feel that real estate will always be the only truly secure investment. If you hold a piece of property long enough, according to champions of REITs, it will eventually recover.