How can you say your portfolio is complete if you don’t invest in real estate? Experts say that a comprehensive portfolio is composed of at least 5% to 10% real estate. Look at your numbers right now. If the majority of your portfolio is invested in stocks and bonds, then you need to diversify it a bit. That’s where real estate comes in. Billionaires have made their fortune through real estate. At least 25% of their portfolio is littered with real estate investments. How are you doing with your own?
It isn’t easy to get into real estate. Owning a home, for example, is deemed by many financiers as an expense rather than an asset. After all, if you have to spend on garage door repair for your home, isn’t that money down the drain and not into your bank account? Still, no one can deny the strength in a diversified portfolio, as well as the dividends and passive income it comes with.
Direct Ownership of Property
When people hear about adding real estate to their portfolio, they immediately think about buying additional property on top of whatever they have now. They think about renting the property out and creating a passive income from it. This way is almost risk-free. You rent out your residential or commercial property and collect the rent every month.
The ownership of properties will allow you to develop and execute a strategy for it. Your influence over the possible return of the properties is direct. You will have your hand on the management of your rental property. However, you are also exposed to certain risks such as the highs and lows of the local property market and other property-type risks.
Some experts also frown at full direct ownership of properties as a diversifying element in one’s portfolio. For them, this strategy does not diversify one’s portfolio. Rather, it creates merely another stream of income that’s impacted by the way you maintain and manage the property. You’re acting more like a businessman rather than an investor.
Real Estate Investment Trusts (REITs)
There’s another way you can diversify your portfolio with real estate. You can invest in real estate investment trusts or REITs. These shares are made up of public and private equity stock in companies that invest in real estate. For example, Company A is a holdings company that owns the outstanding stocks of companies engaged in real estate. If Company A offers shares under its REIT, you can earn dividends from the real estate properties under it.
What kind of real estate properties do REITs own? They operate commercial office spaces, malls, retail shops, shopping centers, groceries, multifamily residential properties, condominiums, strip centers, hotels, and many more. Their portfolio is diversified across many types of real estate properties. You can own a portion of the income generated by these properties.
REITs are easier to liquidate as opposed to direct investments. You can move from one REIT to another without having to go through the arduous and expensive process of selling properties. Investors who cannot manage their properties or cannot afford to buy real estate will do well investing in REITs.
Real Estate Mutual Funds
There’s another way to invest in real estate without the risks associated with direct ownership and REITs. Real estate mutual funds have diversified investments in REITs and real estate properties. You can acquire and dispose of assets through an exchange regulated by a broker.
The good thing about a mutual fund is you don’t need to dispose of these assets regularly like you would when you’re trading stocks. Since a mutual fund has a broad base of real estate investments, it’s likely a safe investment platform. You will also reduce payment of transaction costs and commissions as what’s normal when buying individual REITs.
You might not know it, but you could be investing in real estate already by owning your home. You’re risking your finances through a mortgage, and you’re also continually trying to improve your home. In the future, if you want to liquidate this asset, you could by selling it. Homeownership is also another way to protect and secure your retirement years.
Although many financial experts don’t see homes as assets but liabilities, you should still seriously consider owning a home than renting. You have more control over how you use your home since you can rent a part of it to boost your income. Plus, you can also sell it anytime you want.
If you want to be more prepared for retirement and take care of your family even when you’re gone, you have to think about how diversified your assets are right now. A diversified portfolio creates a strong deterrent against financial setbacks and market fluctuations. Start by looking at real estate investments you can make.