What is it that attracts the everyday investor to real estate?
Could it be today’s television program like Fixer Upper or Property Brothers that show how “easy” it is to increase equity value by 5 percent to 20 percent by giving a home a much needed facelift? Or is it the influence of a friend who’s currently profiting from their own property investments? Maybe you’re just looking to diversify and get away from traditional investment avenues like stocks and bonds. Whatever the catalyst to consider real estate investments, the main driving force is likely financial freedom and a better life without necessarily having to run a business or work a traditional 9-5 job.
In my many years as a property investment advisor, I’ve learned a lot from property developers and landlords about what it takes to invest in real estate properties. I’ve found that while being a property investor can be a great way to make money, as you have direct control over your investment, it actually takes a lot of work and should be considered a business, not a hobby or a side project. You’ll have numerous tasks from researching the correct location and negotiating purchase price, to working out the soft costs (financial, legal, etc.), and of course, if you are renting the property, finding the right tenant who will actually pay the rent. These and countless other arduous tasks that need to be taken care of by property investors will eat into their time, and if they’re not careful, their capital.
That’s why, in my experience, for everyday investors, investing directly in multiple residential or commercial properties isn’t always the best option. In fact, if you’re advising clients on how to diversify their portfolios with alternative assets that include real estate, Real Estate Investment Trusts (REIT) and real estate funds are good alternative investment channels that will allow their portfolios to be indirectly invested in property.
I look at real estate funds for investors as “armchair” investments as there is no management requirement and no surprise maintenance issues. The right real estate fund can offer you the diversity that investing in one particular property cannot. Real estate funds are typically invested in a broad array of commercial properties and locations, so your investment is always spread across multiple assets, and this can far outweigh the bricks-and-mortar security that investment in only one property provides. The tangibility of direct security that many investors require to satisfy a feeling of inner comfort is often a stumbling block that can cause that investor to not reach their return on investment (ROI) potential.
Further, from my experience, everyone is searching for income and the right real estate fund or REIT that can potentially provide a regular stream of income to an investor. In addition, investors can reap other benefits from investing in funds versus direct properties. For instance, REITs and real estate funds have lower investment entry costs, meaning that investors can invest as little as the price of one share. REITs and real estate funds are a highly liquid method of investing in real estate so it’s easier to buy and sell. Finally, REITs and real estate funds can be highly diversified so investors can be invested in a broad range of real estate of commercial properties (i.e., luxury apartments, shopping centers, office buildings) rather than one property or multiple properties in one location.
My advice to any investor is to diversify your portfolio with real estate. You can of course keep yourself busy with property purchases, but remember that if you’re purchasing multiple properties, it’s a timely endeavor that involves maintenance and constant supervision. If your client is interested in alternative real estate investment options, they should consider the security that a backup income like that from an alternative real estate investment product provides. It’s earned whether you get up in the morning or not and will make your decision with other property investments more clear and structured without the fear of not earning. Further, use a structured property investment calculator to get a better understanding of this point. This would be a good start for any with a property portfolio.
Simon Calton is founder and CEO at Rycal Investment Group, a US- and UK-based property advisory firm.