Adding real es­tate to your port­fo­lio

The Covington News - - BUSINESS -

You may have heard claims that “real es­tate is al­ways a good in­vest­ment.” How­ever, that’s a “blan­ket” state­ment and not ter­ri­bly use­ful. In fact, it raises many ques­tions: Does real es­tate al­ways go up in value? What type of real es­tate should I in­vest in? What per­cent­age of my port­fo­lio should be de­voted to real es­tate? Once you know th­ese an­swers, you’ll be in a much bet­ter po­si­tion to de­cide if, and how, you should in­cor­po­rate real es­tate into your in­vest­ment pic­ture.

Of course, real es­tate in­vest­ing has been a hot topic over the past sev­eral years, as hous­ing prices soared in many ar­eas of the coun­try. Even though the mar­ket cooled con­sid­er­ably in 2006, na­tion­wide home prices are up 29.2 per­cent over the past three years and 64.3 per­cent over the past five years, ac­cord­ing to Busi­ness Week mag­a­zine. And of all the homes pur­chased in 2006, 22 per­cent were bought for in­vest­ment pur­poses, ac­cord­ing to the Na­tional As­so­ci­a­tion of Real­tors. While the lat­ter fig­ure is down from 28 per­cent in 2005, it in­di­cates that plenty of peo­ple are still buy­ing prop­er­ties in hopes of achiev­ing a source of in­come, cap­i­tal ap­pre­ci­a­tion or a com­bi­na­tion of both.

If you’re think­ing of buy­ing in­vest­ment prop­erty, keep a cou­ple of points in mind. First, con­trary to myth, home prices do not al­ways go up. As proved in 2006, hous­ing prices, like stock prices, can — and will — go up and down. So don’t buy prop­erty with the ex­pec­ta­tion of con­stant price ap­pre­ci­a­tion. The sec­ond item to re­mem­ber is that once you buy prop­erty, your in­vest­ment hasn’t ended — it’s just be­gun. You’ll need to pay for up­keep, re­mod­el­ing and prop­erty taxes — all of which can be ex­pen­sive — and you’ll have to find good ten­ants — which can be a has­sle.

Does this mean you should avoid in­vest­ing in real es­tate? No. Ac­tu­ally, you may ben­e­fit from own­ing some real es­tate, be­cause real es­tate price move­ments tend to have a low cor­re­la­tion with the price move­ments of stocks and bonds. So if mar­ket con­di­tions are hurt­ing the prices of your other in­vest­ments, your real es­tate hold­ings might pro­vide you with a buf­fer against a more se­vere drop in your port­fo­lio’s value. But as a gen­eral rule, you should prob­a­bly limit your real es­tate hold­ings to no more than five to ten per­cent of your port­fo­lio.

To avoid the ex­pense and po­ten­tial prob­lems of be­ing re­spon­si­ble for a piece of phys­i­cal prop­erty, you may want to con­sider shares of a real es­tate in­vest­ment trust, which buys, op­er­ates, leases and sells com­mer­cial and mul­ti­fam­ily real es­tate. You can typ­i­cally buy REITs in amounts that are ap­pro­pri­ate to your needs, and REITs are avail­able in var­i­ous prop­erty types and lo­ca­tions.

Also, most REITs pro­vide at­trac­tive cur­rent in­come, which can help cush­ion the blow should real es­tate prices de­cline or re­main stag­nant for a long pe­riod of time. How­ever, in­come paid on REITS will be taxed at your in­di­vid­ual tax rate, as op­posed to div­i­dends from stocks, which are cur­rently taxed at a max­i­mum rate of 15 per­cent.

Your fi­nan­cial ad­vi­sor can help you de­ter­mine if a REIT is suit­able for you. If so, you might have found a smart way to get in on “the ground floor” of real es­tate.

Stu­art Hamil­ton

In­vest­ment Rep­re­sen­ta­tive

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