Is real estate part of your investment portfolio?


In the ideal world, the perfect investment is one that has a high rate of return year after year coupled with a low risk of losing money. Here in the real world, perfect investments do not exist.

Investments that generate the highest returns, such as stocks, also carry the highest risk of losing the principle you are investing in. Those with the lowest risk, such as government bonds, pay the lowest rates of return.

Stellar performance year after year doesn’t exist either. Investments that soar one year may plunge the next. We can all look back and say that only one type of asset has done very well in a single year, like stocks have recently. But, it is impossible to say with certainty which asset class will offer the best returns next year.

In short, there is no ideal investment. The key to investing success is to spread your investments across a range of assets. Over long periods of time, a portfolio of mixed investments will generally earn more than an investment in any type of asset.

The most common tactic used by investors to create a balanced investment portfolio is to spread their money across three asset classes:

1. Shares: Rapid rise and fall in value, offer high returns associated with high risk.

2. Duties: we Treasury bills, notes and treasury bills are low risk and low return, while corporate bonds and private debt funds offer higher returns at higher levels of risk.

3. Real Estate: Low risk investment and high return when held for the long term. Real estate protects against inflation but has a high entry cost and cannot be sold quickly.

Each of these assets plays a different role in balancing an investment portfolio. Stocks can generate quick bursts of gains or losses – you can go all out or lose it all. Bonds offer stable income and are popular with older investors who don’t have decades to recoup investment losses like younger investors do. Real estate can be the most difficult investment and for this reason is sometimes overlooked by investors, even though it is a useful portfolio diversification tool. Real estate offers a slow and predictable rate of return over the long term and can be a great way to build long-term wealth.

Investors who have the money, expertise and time to take care of property maintenance and the selection of tenants and capital to cover acquisition costs will find that direct investment in l Real estate is an excellent hedge against inflation that can generate stable income once the mortgage is paid off. A person in their twenties who buys a rental property with a 30-year mortgage is building up a nice source of retirement income that starts at age 50.

However, direct real estate investing is not for everyone. Disadvantages include the difficulty of selling property compared to stocks or bonds. Plus, it takes quite a bit of capital and countless hours to invest directly by buying and managing rental properties.

Investors who do not have a long-term horizon, such as retirees who will not stay in the market long enough to experience sufficient appreciation to cover transaction costs, generally do not benefit from direct investment in real estate. . Those with limited capital may only have enough money to buy low-cost properties. These rental homes can be difficult to manage due to high tenant turnover, low cash flow and low property value appreciation.

Leveling the rules of the real estate investment game

One way around these challenges is to invest in a professionally managed private mortgage fund (full disclosure: I’m the CEO of a private mortgage fund). Private loan funds like this lend money to rehabs and flippers who buy up rehabs, quickly turn them around and then resell the properties. This helps diversify risk, as your investment funds a pool of loans rather than a single transaction. The failure of a single project has a proportionally small influence on the pool compared to the loss you would incur if you invested in a single real estate purchase that went south.

Private Mortgage Fund loans are secured debt securities backed by liens on properties. Most private loan funds don’t lend more than 75% of the property’s value, leaving a 25% cushion if the lender ends up foreclosure because the borrower doesn’t pay – this is conservative relative to the market traditional mortgage, where owners can borrow up to 100% of the value of a property. Private loans are typically repaid in less than a year compared to the 15-30 years of a typical mortgage loan, helping to guard against the risk of a drop in property value while the property is being renovated. Private loan fund investors receive monthly income, so the income stream resembles that of a bond. But unlike a bond, the returns on private mortgages are not affected by changes in interest rates.

Real estate investment trusts (REITs) offer another opportunity to invest indirectly in real estate. REITs buy all kinds of properties, including office buildings, shopping malls, or apartment buildings, and then make money operating those properties. REITs come in two forms: listed REITs and unlisted REITs. You can see the stock price of public REITs while unlisted REITs cannot. Additionally, non-traded REITs are illiquid for longer periods of time.

Although perfect investments do not exist, portfolio balancing can improve any imperfect investments you hold. By investing in all three asset classes over long periods of time, you increase the likelihood of achieving your long-term investment goals.

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