WHY REAL ESTATE INVESTING?
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Why should I diversify my investments?
There are several classes of investments, each associated with its own risk-reward profile; most popular investments are bank deposits, stocks, bonds, commodities, real estate. Reputed financial planners always advise to have a diversified portfolio with a mix or several investment classes and several investments within the same investment class, to construct a portfolio that reflects the risk-reward profile you desire. Certified Financial Planners are most qualified to look at your specific situation and recommend the best mix. This article on Motley Fool gives you a good introduction to this topic.
Why should I invest in Real Estate?
US Census data shows that 65% of US single family homes are owner occupied. Real estate has typically been used as a hedge against inflation and market volatility. Usually, real estate value rises when inflation increases, while markets usually get more volatile. This article on Investopedia gives a good framework for comparing real estate and stocks, in the path to composing a personalized portfolio.
How is Real Estate as an investment class different than other asset classes?
Real Estate differs from other investment classes like stocks, bonds, mutual funds, fixed deposits, and others in terms of flexibility, risk, returns, liquidity, etc. Check out this article from Fortune Builders to get a broader perspective on this subject.
How is Real Estate different than other asset classes?
Real estate has a different risk-return structure and different volatility structure during economic up-swings and down-swings compared to other investments, which can make it a suitable candidate for diversifying an investment portfolio and increasing the overall risk-adjusted-IRR for the overall portfolio. For example, while both stocks and real estate can provide a mix of income and capital appreciation, the amount of investment needed is less for stocks, REITs and fractional real estate investing (aka crowdfunded real estate investing through sites like RealtySlices ), compared to direct real estate investing; they also differ in the hold period, expected IRR and equity multiple, liquidity, tax treatment, etc., Look in the Resources section for more info.
How can I diversify my Real Estate investments?
There are multiple ways to diversify real estate investments in a portfolio. One can choose a combination of property types, property classes, investment strategies, investment hold periods, percentages of leverage, themes of Real Estate Investment Trusts, Fractional Real Estate Investment Opportunities through portals like RealtySlices , Special Purpose Vehicles, etc., to arrive at a well-diversified real estate investment portfolio. One can also diversify by combining active real estate investing with passive real estate investing. Look in the Resources section for more info.
What metrics should I use to evaluate a Real Estate investment?
Common metrics used to evaluate real estate investments are Cap Rate (CR), Internal Rate of Return (IRR), Cash on Cash (CoC), Stabilized Rent on Cost, and Equity Multiple. Other metrics that become relevant depending on the property and its financing are Cash Flow, Net Operating Income (NOI), Operating Expense Ratio (OER), Loan To Value ratio (LTV), Gross Rent Multiplier ratio (GRM), Debt Service Coverage Ratio (DSCR), and Occupancy Rate (as percentage). Check out listings in RealtySlices marketplace to see these ratios listed for various properties. Look in the Resources section for more info.
What are the ways to do fractional investing?
Investing through real estate fractional investing / crowdfunding portals like RealtySlices is very popular because it lowers the barriers to entry for real estate investing. Real Estate Investments Trusts have been the traditional approach to fractional investing with liquidity. Special Purpose Vehicles formed especially to manage a real-estate asset by a closed group of investors is a tried and tested approach. Managed Private Equity funds have a higher investment for entry, and are most common amount higher net worth individuals. Look in the Resources section for more info.
What is the effect of hyper-inflation on Real Estate returns?
When inflation is running hot, real estate is a hedge. In inflationary periods, rents for homes are bound to increase, thus increasing the rental income from investments since the mortgage payment is likely to stay constant. Also, inflation causes the prices of all items, including rental properties to increase in value (with rising rents, the same property produces higher income thus justifying a higher sticker price). Look in the Resources section for more info.
What is the effect of high interest rates on Real Estate returns?
In a high interest rate environment, fewer people are able to afford a down payment and make their monthly mortgage payments. This causes the demand for homes to decrease putting a downward pressure on prices, assuming that the supply remains flat. With lesser affordability for purchasing a home for themselves, people go for rental homes which increases the rents and hence returns from rental investments. Look in the Resources section for more info.
In the current environment, how can the risk of real estate investing be minimized?
Diversification is the best way to reduce risk. With the same capital, an investor can purchase fractional ownership of a wide portfolio of real estate investments, with some clear thought and planning. One can diversify across geographic regions, property classes, property types, investment strategies, etc., to craft a portfolio that is most ideal for the personal situation. Look in the Resources section for more info.
What are the advantages of fractional Real Estate investing?
Fractional investing (aka crowdfunding) enables diversification of the overall portfolio, and within the real estate investment class. It enables you to take advantage of leverage without taking on personal credit risk and the headaches of property management of active real estate investing. Look in the Resources section for more info.
Can funds in an IRA account be used to do fractional Real Estate investing?
IRS has provided detailed guidelines on this. At a high level, one can use funds from a self-directed IRA to make real-estate investments; funds from an 401(k) account with a past employer can easily be rolled over into a self-directed IRA. Look in the Resources section for more info.