An astute investor understands that proper diversification involves holding a range of investments in all asset categories. Such as; stocks, bonds, real estate, and cash. Do not chase the hottest investment class of the moment, because eventually it will fizzle out.
Back before the life of a politician, Donald Trump was best known for being a business legend in real estate. On one episode of his popular TV show, a contestant asked Mr. Trump what type of investment was worthwhile, to which Trump applied “real estate is always a sure thing.”
From his show, to house flipping reality TV, real estate is definitely on the brain. Making us all think that real estate investing is easy and the quickest way to wealth!
Disclaimer–My wife is obsessed with the show Fixer Upper
Real Estate Investing Options
Real estate investing can appear intimidating at first. In fact, countless people shy away from real estate due to a lack of knowledge or experience. In this post, I have put together a speed read to show you some of the ways to invest in this sector.
Direct Ownership Part I
Guess what? If you own a home, you are already a real estate investor. Surprisingly, many people don’t consider their personal residences as part of their asset allocation strategy. This is because many people buy their homes principally as places to live, rather than as investments.
That changes though when it’s time to sell! Why?
Because everyone wants to to realize a profit!
Therefore, a home typically represents one of the largest investments most people will ever make!
Direct Ownership Part II
Purchasing properties such as apartment buildings, rental homes, or office buildings is another way to invest in real estate. These investments main purpose is to generate rental income. A cool thing is that some of the income can be partially sheltered through tax write-offs. Never a bad thing! These properties also have the potential to be sold for profit, like a stock.
However, this type of investing can be time consuming. It requires knowledge of local residential and commercial markets, contractors and permits, I would say this is most appropriate for those who desire to become landlords or property managers as a career.
One option is to turn over landlord responsibilities to a professional management company, but this transfer of responsibilities comes with a cost that will affect your bottom line.
Public and Private Limited Partnerships
Commonly referred to as “passive activities,” limited partnerships typically involve a number of limited partners investing in a property (or group of properties) managed by a general partner or sponsor, such as a brokerage firm. Although partnerships tend to be illiquid as short-term investments, under the right circumstance they may still be viable entities for investing in real estate.
Real Estate Investment Trusts
This investment type is a bit more complex and for those with a bit more income. Real Estate Investment Trusts (REITs) pool investor money, much like a mutual fund, and use professional management to oversee a portfolio that may include properties (Equity REITs), mortgages (Mortgage REITs), or both (Hybrid REITs). REITs usually specialize in specific types of property, such as shopping centers, office buildings, and health care facilities. They may also specialize based on geographical location.
REITs offer investors a way to participate in the real estate market with greater liquidity than limited partnerships and with less personal involvement than direct ownership. These trusts are easily traded on the major stock exchanges and the price generally fluctuates like a stock’s, although for different reasons. Also, a large percentage of a REIT’s taxable income must be paid out to shareholders. Investment return and principal value of REITs will fluctuate due to market conditions, so that shares, when redeemed, may be worth more or less than their original cost. It’s a bit more of a risk, and you will definitely require professional assistance.
Mutual Funds and Exchange Traded Funds
Similarly to REITS, funds focus on real estate by investing in REITs and real estate-related industries. They might buy the stock of building supply companies and home furnishing manufacturers as well. Compared to REITs, which tend to be more narrowly focused by industry and region, real estate mutual funds tend to be more broadly diversified. This may work better for some individuals.
Expand Your Horizons
You don’t have to be Donald Trump to make a profit on real estate. Real estate remains a vital asset category through most market conditions. Perhaps it’s time to reconsider the role real estate might play in your investment program. You don’t have to be an expert politician to run for president, and in the same way you don’t need to be an real estate tycoon to make a sensible investment in real estate.
As always, you can consult with me to discuss how real estate fits into your portfolio.
Look for future posts on the best ways to save for retirement and check out my recent post on asset allocation.
Thanks for stopping by and I hope you achieve financial success!
Bear in mind, past performance is never an indication of future results. In addition, be sure to read the prospectus before investing in any security or variable product. As always, contact your investment advisor with any questions .This website is not approved nor monitored by IFS Securities, thus the content cannot be verified as accurate.
