The investment risk pyramid is commonly used as visual representation of the risk and reward associated with investing. The pyramid has a wide base and a small tip, and the higher up an investment is placed, the greater its risk and potential return. Real estate is usually placed near the top of the investment pyramid for several reasons. First, the return on real estate investments is very uncertain. The amount of profit received from real estate is extremely dependent upon the timing of a sale and the location of the property. If an area has a high unemployment or foreclosure rate, for example, prices of nearby homes will be negatively affected. The same is true when a "housing bubble" (i.e., a period of inflated selling prices) bursts. In addition, real estate is typically highly leveraged. In other words, real estate owners typically borrow a substantial amount of money to finance their purchase. If market conditions sour and real estate prices decline, they could end up owing more on their real estate than the property (i.e., land and/or buildings) is worth. We would like your feedback on this Personal Finance Frequently Asked Question.

Browse related Faqs by tag: personal finance, homeownership, investing