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How to Add Real Estate Investment to Your Portfolio

In 2007, two-thirds of Americans were investing in the stock market. However, over the last decade, this number has dropped to 50%, and the other half of investors have shifted their eyes to real estate. 

There are numerous advantages to investing in the real estate market. Real estate assets are a great way to diversify your investment portfolio and hedge for inflation. Depending on how you invest in real estate, you can also enjoy tax advantages, increased leverage, and a form of passive income. 

However, there are also some risks and downsides to real estate investment.

It is essential that you thoroughly evaluate your options and pick a real estate investment type that suits your needs. Continue reading to find out how to build a real estate portfolio that works for you, not you for it. 

Identify Your Wealth Management Goals

The first thing to do before getting started with real estate investment is to identify your wealth management goals. 

Ideally, you should do this with an experienced financial planner who can guide you on how to build a strong investment portfolio that’s tailored to your personal situation. 

However, before you sit down with your financial advisor, ask yourself the following questions:

  • How much diversification do I need?
  • What is my level of risk tolerance?
  • Do I want a hands-free real estate investment or something I can actively manage?
  • Can I afford to lose liquidity?

These are all important areas to think about. For instance, if you don’t have the time or desire to oversee a rental property, then buying directly into the real estate market is probably not a wise move.

If you’re in a situation where you might need quick liquidity, then buying a property is also not the best choice, as you’ll need to lock up a lot of capital in a non-liquid asset. 

Fortunately, there are ways you can invest in real estate and still retain liquidity and build passive income. 

Direct Real Estate Investment

Once you have decided what your wealth management and investment goals are, the next step is to compare the different ways you can build your real estate portfolio. 

One of the most common ways retail investors get into the real estate market is through directly buying one or more properties. These could be rental properties, fixer-uppers, second homes, primary homes, commercial spaces, etc. 

Pros

One of the primary pros to directly buying property is that there is the potential for good returns. If you are familiar with the real estate market in your area, you might be able to spot a good opportunity and snatch it up. 

Even if prices drop, real estate can still be a more sure investment than things like stocks. Because real estate has inherent, tangible value, it’s just about impossible for a property’s value to drop to zero. 

Buying property can also increase your leverage. Once you build up a certain amount of equity in a property, you can use it as collateral to finance another investment property. 

This kind of real estate investment also comes with some attractive tax advantages. For instance, you can write off things like property taxes and maintenance costs as expenses. 

Cons

If you want to put your wealth management on auto-pilot, then buying a property is probably not the answer. Buying and selling individual real estate properties can be time-consuming. You have to organize evaluations, inspections, financing, staging, etc. 

If you rent out property, then you’ll also need to spend time managing it. Even if you engage a property management company, there will still be some work involved. 

Buying property can also come with a lot of unforeseen costs. According to statistics, costly maintenance fees and expenses is the biggest regret real estate buyers have. 

REITs

If you want a more hands-free way to invest in real estate, then you can also consider buying into a REIT. REIT stands for real estate investment trust. 

REITs own and operate real estate properties and allow investors to buy shares in their real estate portfolios.

Pros

By buying REIT stocks, you can enjoy some of the benefits of real estate investing, without having to actively manage property. REIT stocks typically offer above-average returns and usually out-perform the S&P 500. 

REIT stocks also come with lower barriers to entry. Instead of having to produce the capital to buy an entire property, you can buy as few or as many REIT stocks as you want. REITs also gives private individuals a chance to invest in commercial properties that would usually be out of their reach. 

If publicly traded, REIT stocks also offer enhanced liquidity. You can sell your REIT stocks in a matter of minutes or hours, whereas a real estate property can take months to list and successfully sell. 

Cons

One of the main drawbacks of REITs is that they are taxed higher than “qualified dividends”. REIT stocks are also sensitive to interest rates, usually perform best over the long term, and can have some property-specific risks. 

For instance, hotel REITs are vulnerable to recessions.

Real Estate Funds

Another way to passively invest in real estate is through real estate funds such as real estate ETFs or real estate mutual funds. 

These types of real estate funds invest in securities from public real estate companies, including REITs. 

Pros

Real estate funds offer one of the easiest, most diversified ways to invest in real estate. One real estate fund might have shares in multiple REITs spanning various sectors of the real estate market, which means you automatically get more diversification. 

Because they are more diversified, real estate funds usually have more stable performance and require less intensive research than REITs. 

Cons

Unlike REITs, real estate funds don’t pay out dividends. Instead, they provide value through appreciation. Because of this, real estate funds aren’t a source of short-term passive income. 

They also don’t offer the same tax advantages as direct real estate investment.

Are You Looking for Real Estate Investment Assistance?

Real estate investment is an important part of wealth management and portfolio diversification. 

However, there are a lot of factors to consider before you start putting money into the real estate market. 

Do you feel like you need some independent advice before you get started?

Contact Bogart Wealth today and we’ll be happy to help. 

IMPORTANT DISCLOSURE INFORMATION:
Please remember that past performance is no guarantee of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Bogart Wealth, LLC [“Bogart Wealth”]), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level (s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Bogart Wealth. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Bogart Wealth is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the Bogart Wealth’s current written disclosure Brochure discussing our advisory services and fees is available for review upon request or at bogartwealth.com


Please Note: Bogart Wealth does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to Bogart Wealth’s web site or blog or incorporated herein, and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly.
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