Explore Our
“Off The Wall” Blog
Unique, straight-forward, unfiltered opinion on topics of concern for individuals with newfound wealth.
Investing in Real Estate as an Alternative Asset Class
Is real estate as an alternative asset class right for you? Here are three ways to invest in real estate.
The use of “alternative investments” has increased significantly over the last few years. This trend began when investors and advisers started looking for ways to get a reasonable return on their investment dollars without using the traditional equity market. They are looking to try to get away from volatility that has become all too common.
Interest rates are near 30-year lows, and the U.S. economy is stumbling along, growing at somewhere in the neighborhood of 2 percent per year. It’s not exactly a robust economic recovery, but still enough economic activity to keep the threat of rising interest rates in the back of most advisers’ minds. This, in turn, sends shivers down the spine of anyone thinking of investing in long-term fixed-income products. The inverse relationship between interest rates and the price of bonds would have a very negative impact on certain portfolios. In particular, portfolios with fixed-income products that are not held to maturity will not fare well.
What is an investor to do? The answer could be alternatives. Alternatives come in many forms. They include products such as commodities and real estate. Real estate is the area that most people have some understanding of and are likely to consider. Investing in real estate generally offers some appealing benefits. Benefits include fairly predictable income (rent), some form of tax benefit (deprecation or the tax deduction of mortgage interest), and some stability.
So when do you buy real estate? Like anything else—when it’s cheap. Real estate is cheap when demand is down, and demand is down when the economy is weak. Not only does the weak economy make real estate less expensive, but it also results in lower interest rates. The question you have to ask yourself is: “If I buy now, can I hold on until things turn around?” Locking in a low rate mortgage loan would help keep the costs down and make the property more affordable until it’s time to sell. Real estate generally goes up in value when inflation begins to make itself known. So, depending on your economic outlook for the next few years, now might be a good time to invest in real estate.
Direct Investments in Real Estate
Making a direct investment in real estate is straightforward. You find a piece of property you like, get a mortgage from the bank, pay a bunch of fees at settlement, and you’re done. You’re a real estate investor. It sounds relatively simple, and it can be just that simple. Simple, however, does not mean that it will be successful. Obviously, I have left out a lot of the details, expenses, and risks involved in this type of investment. These include maintenance, renting, taxes, insurance, and security. All of these additional items can turn what was a good idea at some point into potentially one of the worst decisions you ever make. Direct investments in real estate are serious business and are not for the casual investor. In my opinion, direct investments in real estate can have the highest payoff of the options, but they also carry the highest level of risk.
Investing in Publicly-Traded Real Estate Investment Trusts
The second option is to put your money in one or more publicly traded REITs. The REIT managers will invest your money in various properties that they deem appropriate. They will manage the properties, take care of all the expenses, and look for appropriate times to sell the properties at a profit. REITs pay out 90 percent of the profits they earn every year in the form of a dividend. The dividend that you receive from the publicly traded REITs can and will change over time, but a range of 3.5 percent to 5.5 percent is a reasonable expectation.
These publicly traded REITs offer something that direct investing does not: liquidity! You can buy and sell any time the equity markets are open. You can also pick and choose the type of properties you want to invest in. There is a lot to choose from, so do your homework. Different types of properties react differently to changes in the economy. There is a lot to understand here, and I won’t try to make you an expert. But I will give you one rule to keep in mind: The shorter the term of the tenant, the faster the property price will react to changes in the economy. For instance, hotel REITs whose tenants usually stay only a night or two tend to react faster than REITs that invest in buildings occupied by big stores with 15+ year leases. Another issue to keep in mind is that the price of REIT shares is more correlated with general economic trends than with actual property values. When the REIT price is higher than the actual property values, the shares are considered to be selling at a premium. When the price is below what is considered the actual value, they are trading at a discount.
Investing in Non-Traded Real Estate Investment Trusts
The third option to look into is a non-traded public REIT. This is a lesser-known product but is still an option open to the retail investor. They are similar to the traded REITs in what they are trying to accomplish: income with the chance of capital appreciation. They are offered by a number of different companies and have specific types of properties they invest in. They tend to pay a higher level of current income than the traded REITs, generally in the range of 5 percent to 7 percent, plus they may provide capital gains when the REIT looks to close out. What they don’t offer is liquidity. Investors should only look to invest in non-traded REITs if they have a time horizon between 5 to 10 years. One of the features of the non-traded REITs is that it is hard to determine if you are buying at a discount or a premium because they don’t get valued until after they stop taking in investors.
To sum things up, making an alternative investment in real estate could prove to be a good addition to your portfolio. It may help smooth out the ride from these volatile markets and add a little potential income to allow you to continue to diversify. As with any investment you make, do your homework. The devil is in the details. If you cannot take the time to learn the details, then seek the advice of a qualified adviser who understands the nuances of investing in real estate. There is a lot to know, but the benefits could be well worth your time.
Read the article on U.S. News & World Report here! >
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for individuals. To determine which investment is appropriate, please consult your financial advisor prior to investing. All performance references are historical and are not a guarantee of future results.
IMPORTANT DISCLOSURE INFORMATION
Please remember that past performance is no guarantee of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Monument Capital Management, LLC [“Monument”]), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Monument. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. No amount of prior experience or success should be construed that a certain level of results or satisfaction will be achieved if Monument is engaged, or continues to be engaged, to provide investment advisory services. Monument is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice.
A copy of the Monument’s current written disclosure Brochure discussing our advisory services and fees is available for review upon request or at www.monumentwealthmanagement.com/disclosures. Please Note: Monument does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to Monument’s website or blog or incorporated herein, and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly.
Historical performance results for investment indices, benchmarks, and/or categories have been provided for general informational/comparison purposes only, and generally do not reflect the deduction of transaction and/or custodial charges, the deduction of an investment management fee, nor the impact of taxes, the incurrence of which would have the effect of decreasing historical performance results. It should not be assumed that your Monument account holdings correspond directly to any comparative indices or categories. Please Also Note: (1) performance results do not reflect the impact of taxes; (2) comparative benchmarks/indices may be more or less volatile than your Monument accounts; and, (3) a description of each comparative benchmark/index is available upon request.
Please Remember: If you are a Monument client, please contact Monument, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. Unless, and until, you notify us, in writing, to the contrary, we shall continue to provide services as we do currently. Please Also Remember to advise us if you have not been receiving account statements (at least quarterly) from the account custodian.