By Robyn A. Friedman
City & Shore Magazine
It’s a new year, and a new opportunity to tweak your investment portfolio. Due to the current low-interest-rate environment, many financial experts are touting the benefits of adding real estate to your portfolio. But should you?
Owning real estate has pros and cons, of course. But experts say it’s a great way to diversify your holdings and build wealth.
“Most well-thought-out portfolios consist of four major asset classes: stocks, bonds, cash and real assets,” says Michael Silver, a certified financial planner in Boca Raton. “Real estate can provide the investor with significant appreciation, income and tax benefits through depreciation – and it should be a consideration for any investor whose goal is to build wealth over time.”
Despite its advantages, real estate is not for everyone. It’s an asset that’s not liquid, so real estate is best for those who can afford to wait for a return on their cash. And, depending on the property you purchase, it might require more active management than some investors desire.
Interested in investing in real estate in 2022? Here are some things to consider:
- Those who want to own real estate but prefer to spend less time actively managing their assets may want to look into investing in a publicly traded real estate investment trust (REIT) or purchasing the stock of a builder. More savvy investors may want to check out private limited partnership deals or crowdfunding.
- How much of your portfolio should be devoted to real estate? According to Ken H. Johnson, Ph.D., a real-estate economist at Florida Atlantic University in Boca Raton, the optimal formula is 50 percent real estate (which can include the value of your personal residence), 30 percent stocks and 20 percent bonds. “You get a better risk/return profile from owning real estate,” he says.
- What type of assets should you invest in? Many individual investors purchase single-family homes, which they often rehab and then rent out. Returns on single-family rental properties have been strong. According to CoreLogic, a property-data firm, in October 2021 (the latest month for which statistics are available), single-family rents, buoyed by high housing prices and tight inventories of homes available to purchase, increased 10.9 percent year over year, up from a 3.2 percent increase in October 2020. Of course, being a landlord to residential tenants can take up a lot of your time – and who wants to receive a call in the middle of the night from an angry tenant reporting that the air conditioning stopped working? Hiring a property management firm can eliminate some of the management headaches, but that cuts into your cash flow, as managers typically charge the first month’s rent plus 10 percent of each month’s rent thereafter. An alternative is to purchase commercial real estate, which, depending on the asset acquired, may require less management. Joe Pelayo, a commercial real estate broker in Fort Lauderdale who works with mom-and-pop investors, says that warehouse properties and medical-office buildings have tenants with long-term leases that generally require less oversight.
- Brush up on financial principles governing real-estate investments. Before you invest, learn the formulas for terms such as net operating income and cap rate – terms that brokers use and expect you to understand. And make sure you understand the local market. “It’s important to have the professional market knowledge to make the right short- and long-term decisions,” says Pelayo, who added one more piece of advice for would-be investors: “Value the investments without falling in love with the property. Love is very expensive.”
Main photo: SONG ABOUT SUMMER, stock image.