When people think of investing, the traditional things that come to mind are the big three: stocks, bonds, and cash. However, with the rise of alternative investing assets, such as real estate, people are changing the way they think about investing. In 1975, only the big three were accepted as asset classes but that has changed considerably. Today, the U.S. apportions 10 percent of investment funds to real estate and 10 percent in other alternative investment classes, both of which have surpassed the 5 percent allocated to cash investments.
How did real estate become such a prominent investment class? Alternative asset classes were necessary in the first place because of the instability in the conventional equity market. Investors wanted a way to get a sound return on their investments without the volatility. Real estate offered some stability, a relatively steady income, and tax advantage. A key driving force in the rise of realty was in the form of Real Estate Investment Trusts (REITs). These companies made headway for institutional investors to add commercial real estate as an investment class.
Investing in real estate is not just for institutional investors, you can do it too! It should go without saying that the best time to purchase real estate is when the economy and demand are down because then real estate is cheap and interest rates are at a minimum. There are three main ways to get involved in real estate investments: direct investment, publicly traded REITs, and non-traded public REITs.
The first option, direct investment, can have the largest payout, but it is not without risk. It’s simple in that the investor buys a property, obtains a mortgage, and pays settlement fees. But it can be a gamble and just because it is straightforward does not mean the profits come effortlessly. Things to take into consideration include but are not limited to maintenance, renting/tenants, taxes, insurance, and security.
If you are a more spontaneous investor, you might prefer to participate in publicly traded REITs. Here, you can choose which type of property you want to invest in and REIT managers will invest your money in numerous suitable properties. Just keep in mind that various types of properties respond differently to the fluctuating economy, so choose wisely and in accordance with how quickly you prefer the property price to react to changes in the economy. Investing in publicly traded REITs allows you to relax while the company manages the properties and expenses and determines proper times to sell. REIT companies generally pay out about 90 percent of their annual profits. Each investors dividend typically ranges from about three to five percent. Because you can buy or sell anytime markets are open, this type of real estate investment allows for liquidity that direct investments do not.
Non-traded public REITs are another way to invest in real estate. Like publicly traded REITs, the objective here is to provide income with possibility of capital growth. These investments provide income at a higher level than the publicly traded REITs and can provide capital increases at close out. They do not, however, present the same liquidity. This type of investing requires a much longer time span.
Overall, real estate as a separate investment class is becoming more and more prominent. There are multiple ways to take advantage of this investment, you just need to pay attention to what your financial situation allows. Be sure to research thoroughly before taking any risks.
Get Help with Real Estate Investments
Rice Law Group specializes in helping individuals with their real estate investments. Work with a New York estate planning attorney who specializes in helping individuals plan for the future. Call us at (212) 944-1180 or fill out our contact form online.
