Wed07302014

Business & Real Estate

Real estate success similar to stocks: Diversify

By Artie Greene With the stock market bouncing like a jet-propelled roller coaster, you might question if this is a good time to invest in real estate as an alternative. After all, there are still many depressed properties out there; and despite the high prices the Bay Area commands, it might be possible to find something that could generate positive cash flow as a rental. What you may not be aware of is that there are myriad ways to invest in real estate beyond simply acquiring that foreclosure down the street, spiffing it up and finding someone to rent it without trashing it. Some of those alternatives can be considerably less risky, not to mention significantly less onerous to manage. First of all, there are commercial properties you can purchase and lease out. They’re all around you, from the local Jack in the Box to that auto-repair shop that fixed your engine thermostat last year. Unlike residential real estate, commercial-property valuation is based on expected rental income rather than supply and demand. With commercial leases running five to 10 years or more, the return on investment can be estimated much more accurately. Additionally, laws and regulations addressing commercial property owners are much less burdensome than those on owners of residential rental housing. On the other hand, the risk of a small business tenant going bankrupt in today’s economy can be pretty high. Therefore, investing in any individual property – commercial or residential – should be considered high risk. One way to reduce the risk is to spread your investment across a number of different properties. That’s what a Real Estate Investment Trust (REIT) does. In particular, equity REITs provide exposure to income-producing real estate in many different sectors such as office, industrial, retail, multifamily, health care, self-storage and lodging. Equity investment trusts provide significant geographic-diversification potential. Best of all, they are available as publicly exchange-traded funds and mutual funds you can buy or sell just like stocks. And because equity REITs are required to distribute at least 90 percent of their net income as shareholder dividends, you receive current income as well as property appreciation. There are various other types of real estate investment vehicles, such as land banking (investing in undeveloped or partially developed land) and tenant-in-common partnerships (involving shared ownership of income-producing properties). But those involve direct purchases of real estate, which are illiquid and can tie up your money for long periods of time. Your financial planner should be able to help you determine what’s best for you based on your specific financial situation and goals. I wouldn’t recommend putting all your money into real estate, but REITs or other types of real estate generally can and should be at least a part of a well-diversified portfolio. Artie Green is a Los Altos residen and certified financial planner and investment adviser with PWJohnson Wealth Management. Contact him at (408) 747-1222 or email artie@ pwjohnson.com.

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