Real Estate - The Portfolio Solution? Maybe, Maybe Not.

Tackling investing can be a confusing proposition. Should you own stocks or mutual funds? If mutual funds, do you look for open end or closed end? What about ETF’s? Should you consider Real Estate Investment Trusts (REITs) or actual real estate? If physical real estate, is commercial or residential best… or maybe raw land? Who knows? This is a common dilemma faced by investors who are trying to diversify their investments to reduce risk and increase return.

I am often asked “Is real estate the best investment?”

My answer is almost always the same. That depends. Personal investing is exactly that, personal. I hold to the adage that Real Estate is a rich man’s game, but I know people who do not necessarily have a fortune and still do quite well buying and selling real estate. I have dabbled in it with moderate success, but I will never be a big player in the Real Estate market. Like any type of investing, you have to do your due diligence. Missing a small piece of the puzzle can result in large mistakes. Of course, the question you must first answer is “When you talk about investing in Real Estate, what type of investing do you mean?”

There are several different directions you can go. You can develop a nice portfolio of rental properties. This could mean residential or commercial rentals. It can be a hybrid portfolio such as owning a commercial building with residential rentals above a specialty store or restaurant. If you go this direction, I would suggest that you have a reserve of cash to cover the mortgages when you do not have tenants, which will occur at times.

You could partner with a contractor to develop a real estate flipping operation. That’s where you purchase fixer-uppers and rehab the houses before selling for a substantial profit. Of course the danger here is running into serious problems that cost you more than your rehab budget. It is probably easier to lose money doing this than it is to gain. Success here is measured by the team you have assembled and their ability to do quality work at an affordable price in a short amount of time because, in this market, time is money.

There is also the purchasing of raw land for resale. Several things to consider are location, potential for demand, and the desirability of the property over other properties in the area. Land is an interesting commodity because you cannot make more land. Therefore, finding a desirable piece in a growing area with beautiful views and amenities is difficult. So if you choose to go this route, take your time when you are in the buying stage.

Another way to invest in Real Estate is to look for publically traded Real Estate trusts. Also known as REIT (Real Estate Investment Trust), this is a way to be involved in Real Estate without actually owning the property. You can choose from retail, residential, healthcare, office and mortgage REITs. Look for companies with both high dividend yields along with moderate long-term capital appreciation. These are true “total return” investments.

Each of these different options involve risk, but you have to measure risk verses return. Real Estate 

investing can be exciting and stressful at the same time. The one warning I would make is don’t play a rich man’s game with a poor man’s wallet. I have tried on several occasions to purchase residential rental property and have always backed out. I just do not have the temperament to be a landlord. Plus, I could not get to the place where I could commit a significant portion of my savings and investment dollars to a non-liquid asset.

I have occasionally purchased land to resell, but I do not do it often because there is not a significant amount of money in raw land. However, if you purchase it in the right location, you can generate a decent return on investment. I have often generated an 8 percent annual return on land I have purchased and resold. Not enough to get rich, but certainly a welcome profit.

Real Estate can be a part of any investment portfolio. There are ways to make money in Real Estate. I know several people who have, but you have to know what you are doing and you have to have an iron stomach. Building a team of professionals is the key to being successful. Many rules about lending work against the want-to-be landlord, so keep your ears open and your mind engaged. It can be a roller coaster ride that you might decide is too wild for you.

Learning how to build a financial strategy takes time, but it also requires you to learn as much as you can. Adding real estate to a portfolio can be a good move, but it can also add problems to your plan. Pick up your copy of Simple Wealth Building Strategies and learn more about building a strong financial strategy. Lay the foundation of success by making sure you have the correct tools with which to work.