Bill Rapp here with the Heartfelt and Hot in Houston Blog, and this is our newest segment: Real Estate Investments For-Diversifying!
The incredible stock market volatility we’ve seen of late is an important reminder that, when you invest in stocks and mutual funds, you risk seeing a significant decrease in your wealth overnight. If you’re not comfortable with this reality, you could consider augmenting your portfolio with real estate investments.
When considering the multitude of commercial and residential real estate investments you could make, it’s helpful to evaluate each based on two criteria: income potential and value growth potential. Loosely defined, income potential is the amount of cash flow you’ll see from the investment on a monthly or annual basis, and growth potential the amount that the real estate asset you’re holding could increase in value over time. For those looking to augment a portfolio, here are three possible real estate investments to consider. Real Estate Investments For-Diversifying!
Real Estate Investment Trusts (REITs)
REITs are companies that own a variety of residential or commercial real estate assets. As you begin to research REITs, you’ll see there are quite a few different types, from equity REITs, which own residential or commercial properties, to mortgage REITs, which either lend money to homeowners themselves or own mortgage-backed securities.
Much like you can buy shares of Apple, you can also buy shares of REITs on stock exchanges. Buying a REIT has significant value growth potential in the long term, but trading REITs to generate short-term cash flow comes with similar risks that you’ll find with trading stocks.
This helpful article I recently read about REITs offers much of the detail about why you should at least consider augmenting your portfolio with this investment vehicle. I’d also add that there are some opportunities worth considering in the REIT market right now, particularly as REITs that own residential mortgages went down in value significantly in March.
Private Commercial Real Estate Investments
In recent years, private commercial real estate investments have come onto the map. Similar to REITs, these investments have significant potential for value growth over time, but are not designed for short-term buying and selling that could generate cash flow.
While the current pandemic is having a significant impact on the commercial real estate industry at the moment, it’s worth noting that private commercial real estate’s average return over a 25-year period is 9.4%, according to the National Council of Real Estate Investment Fiduciaries.
I’ve written extensively about building wealth through income properties. Here, I’ll just add that with mortgage rates continuing to hover around all-time lows, owning a rental property will continue to be an attractive investment in many U.S. cities.
Income properties generate cash flow from renters, as well as value growth as the property’s worth increases over time. I’ve been a landlord for over a decade in Boston, and I can say from personal experience that this double bottom line provides landlords with unparalleled investment stability. And while there’s a lot that goes into maximizing investment property returns, the time and effort spent is more than worthwhile.
If you’re already planning to move this spring and you have equity in your current home, you might consider turning the home you’re moving out of into an investment property instead of selling it. You may find that you’re able to refinance your home to afford the down payment on the home you’d like to move into, and begin renting it shortly after you move out.
If owning a second property isn’t in the cards, I often encourage hopeful investors to consider putting an addition on the current house or finishing the basement and treating it as an investment property. This type of renovation would certainly add value to your home while generating cash flow through long-term renters or shorter-term vacationing guests.
The current economic climate offers an important reminder that putting all of your investing eggs in one basket can result in a bumpy ride. If you diversify your investments across stocks, bonds and mutual funds plus commercial or residential real estate, you’ll put yourself in a better position to weather the bear markets and build wealth more predictably. Real Estate Investments For-Diversifying!
The inspiration for today’s edition came from this original article: https://www.forbes.com/sites/forbesrealestatecouncil/2020/04/03/three-real-estate-investments-for-diversifying-your-portfolio-in-2020/#23667d057f37
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