Jim'sMoneyBlog

Financial Opinion and Insights

Should You Invest In Real Estate?

Jim Lorenzen, CFP®

Jim Lorenzen, CFP®

Hey, they ain’t making any more of it!  Unlike the dollar, the government can’t print real estate; so, I’ve been a long proponent of real estate investing.  But, then, I’m also a proponent for investing in stocks.  I also like commodities.

What do they all have in common?   They all have had their ups and downs.  There have been times when people have made money – or been hurt – in all of them.  That’s why we diversify.

Because the real estate market is composed of non-interchangeable, unique, illiquid properties, it might be considered as less efficient than the stock and bond markets; but, that inefficiency is probably what creates exploitable opportunities for skilled investors.  But, because each investment is unique and non-liquid, it’s important that real estate investments be adequately diversified.

You can diversify your real estate portfolio by having ownership interests in different types of real estate, such as:

  • Office buildings
  • Residential apartment complexes
  • Shopping centers

And, you can diversify geographically, as well.

Want to buy your own apartment building?  You can, but you might consider this:  You wouldn’t be purchasing an `investment’ as much as you’d really be buying a full-time business.  Tie all your money up in that one business and you’re back to having all your eggs in one basket, hoping the equity will be there when the day comes you actually need it.   As recent history has shown, that can be problematic.

Equity real estate investment trusts (REITs) can provide an alternative method to provide real estate diversification.  Equity REITs are publicly traded operating companies that own and manage real estate properties.  Similar to mutual funds, equity REITs serve as a conduit for earnings on investments and avoid corporate taxation by meeting certain investment and income distribution requirements.

One of the reasons many investors include REITs in their portfolios as a diversification tool is because they’ve offered long-term total returns comparable to the stock market – dividend income has been a major portion of that return – and equity REITs have had a relatively low correlation with both the U.S.  bond and stock markets.

How big of a role should real estate play in your portfolio?  That’s something you should discuss with your advisor.    But, don’t fall prey to common misconceptions many investors have, thinking their home is a real estate investment (it isn’t, it’s shelter, and you’ll always need to have one). 

One thing is for sure:  If you don’t have a formal, written financial plan for your future, you really don’t know how much real estate – or what kind – you should have.  And, getting older without a plan is never a good idea.

Jim

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Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER™ and in his 20th year of private practice as Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located in New York, Florida, and California.   IFG does not sell products, earn commissions, or accept any third-party compensation or incentives of any description.  Nothing contained herein should be regarded as tax or legal advice and the reader is urged to seek competent counsel to address those issues.   The above represents the author’s opinion and should not be regarded as investment advice which is provided only to IFG clients upon completion of a formal financial and investment plan.   For questions or comments, you can reach Jim at 805.265.5416 or through the IFG website, http://www.indfin.com.