By Thomas Kostigen
Despite the promises of late-night informercial, get-rich-quick programs, direct real estate investing usually takes significant capital and market know-how. And even with money and knowledge, returns don’t come easy. Here’s why: since 1940 real estate appreciation –the average home value– only risen 1.5 percent per year, after taking into account inflation. That is about four times less than what the stock market brings in.
Still, there are ways to invest in real estate without the burden of direct ownership. Real estate investment trusts (REITS), of course, put professional managers at the helm and through the power of pooled funds and a diversified portfolio, can outperform the stock market. For the 10-year period through July, 2019, for example, Vanguard’s real estate exchange-traded fund outperformed the S&P 500 index. There are other real estate investment possibilities, too, that can bring in large returns. It should be noted that real estate portfolios invest primarily in REITs. REITS directly own and manage properties, and they typically specialize in a particular property type: apartments, factories, hotels, office buildings, shopping centers, or other niches. REITS are dividend-oriented and are required to distribute at least 90 percent of their taxable income annually to shareholders. Besides REITS, there are mutual funds that also invest in real estate companies themselves (not just portfolios).
During the 1980s, real estate limited partnerships garnered big returns and provided huge tax advantages for investors. Today, funds aimed at investing in Opportunity Zones–typically low-income neighborhoods in inner cities—are looking to replicate those performances with similar tax benefits based on current Internal Revenue Code guidance.
Because real estate funds have management fees, expense ratios, and are diversified, investors don’t often end up with the home run of, say, flipping a house for 100 percent return.
To be sure, commercial real estate can afford capital appreciation and generate income because properties garner long-term rental income from businesses. Same thing with apartment complex or multi-unit real estate investing. But these investments are usually designed as private partnerships and require large investment minimums. The landscape, however, is changing. Diversify Fund, for example, offers investments in multi-family real estate deals for as little as $500. They pick the properties, manage and renovate the buildings, reinvest the cashflow, and sell when the time is right.
Timing when to buy and/or sell, of course, is key to real estate investing—just like it is with any other asset class. That’s why it’s important to consult with a financial advisor to figure if investing in real estate is right for you.
With remote working straining office building rentals, prices are sure to be affected. And as unemployment continues with millions out of work, residential prices, too, may be affected. These factors may actually present buying opportunities. Anecdotally, by example, a real estate agent neighbor informs that any property in Los Angles under $2 million almost automatically goes into multiple offers. That means there is an appetite out there for buyers. Perhaps, even, investors. For real gains, however, it may be best to leave the investing to the pros.
Thomas Kostigen is a contributing writer to MyPerfectFinancialAdvisor, the premier matchmaker between investors and advisors. Thomas is a best-selling author and longtime journalist who writes about environmental, social, and governance issues.