On the one hand, you want to be bold in your investing. Other the other hand, you would love to shelter it from heavy risk, especially risk that is unnecessary for the returns you seek.
Would housing be a good shelter for investment money, like it is for your family?
About Real Estate: The Good
Among the various investment vehicles, real estate is a unique vehicle because it is one of the few tangible assets, and it is about the only investment in which the owner or investor can have control over the valuation of the property – such as, whether to maintain the property, replace roofs, get new tenants, evict bad ones, etc.
Real estate can add diversity to your portfolio, whether you buy a single property in which you will reside, or whether you will buy one or several buildings to rent or lease. There are some advantages in getting involved in real estate as a part of your overall portfolio:
- Less risk on yields. With real estate in your portfolio, you can maintain any current yields you’re receiving with decreased risk, as real estate is a bit more stable than most vehicles (stocks and commodities, for example) and rarely becomes worthless. Real estate could also maintain your risk level but increase your yields, especially rental properties that remain rented consistently.
- A hedge. No, we don’t mean the bush being a shelter, but rather that real estate can be a hedge on inflation. Many rental properties have stipulations in their rental agreements that allow the owner to increase rent with each new lease according to an increase in inflation, so as long as the property remains rented, the income received will always be a step ahead of the cost-of-living increase.
- While housing markets have their bull and bear runs like other investments (the existing-home market is running at a high pace nationally of late), real estate is never worthless and as a long-term investment it can average 4-5 percent growth annually, which keeps pace with inflation. It makes sense to park some of your nest egg in case inflation saps your buing power later.
- Unlike stocks or other commodities, where market forces tend to dictate price and value, with real estate you own you have some control over the value of your property in the market. If you maintain it properly, keep up good curb appeal and have reasonable rents where it is rented regularly and you have a good vetting process for quality tenants, you can increase the value of the property regardless of the market. When you don’t do these things, your property can drop in value regardless of the market.
About Real Estate: The No-so-good
Also, you should know that while real estate has a lot of upside, there is also some downside just like with other investments. Before you decide to get into real estate, you will have to weigh the pros mentioned above with these cons:
- As you might imagine, getting into real estate involves a heavy initial investment (unless you get into a REIT, which will be explained in a minute). Not only that, but the time and cost to maintain and operate it, and potential cost when a tenant doesn’t pay the rent, can also be expensive.
- No liquidity. If you need money quickly, don’t put that money in real estate. Real estate is very difficult to buy and to sell, and any money you might need from a real estate investment can’t be taken out until you sell the property. Your money is locked in, as the property can take weeks or months to sell.
- Market timing. Because it is so hard to buy and sell properties, trying to time the market to take advantage of bull or bear runs is a matter of luck, hoping that the run lasts long enough for you to get in or out accordingly in the weeks or months it takes to buy or sell. And any run doesn’t happen quickly, so you could miss the beginning of it because the movement is subtle over months – and by the time you notice it may be too late.
What about REITs?
A low-cost option for getting into real estate is via an indirect route called a REIT, or a real-estate investment trust. A REIT is an investment vehicle that is traded in a similar fashion to a stock. To invest in a REIT is to invest in a company or association that owns and operates rent-bearing properties such as apartment buildings, shopping centers, commercial or industrial facilities, and residential properties.
The advantages of a REIT as a real-estate investment are that a REIT is like a stock, so the money invested is fairly liquid and you can get money by selling your shares in minutes with a phone call to your broker. Also, like a stock or bond, to invest in real estate through a REIT takes a minimal up-front investment of $500 or $1,000, instead of six-figures like an actual real property. Also, REITs can provide better returns on your investment as an annualized percentage over time, that far exceeds that of inflation in some cases.
The downsides to investing in REITs are that with such a small investment, it will be hard to make significant monetary returns. Though you have a much larger initial investment in real property, it can be a shorter time to make $25,000 on that investment than if you invested $5,000 in a REIT. Also, with a REIT you don’t own any property yourself, so you are not in control of increasing the value of your investment. REITs also have the risk of being worthless and have volatility that is more significant than direct real property.
Real estate can be a wonderful investment, whether you buy real property or go into a REIT. However, because of its various pros and cons, it should never be a large portion of your portfolio but instead should be part of a diversified group of assets that can provide some shelter for your nest egg, stability in the long-term and beat inflation to allow you to have more buying power when you sell.
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