Should Real Estate be a Part of Your Investment Portfolio?
Submitted by S. Leonhard
Real estate is often used as part of a long term investment strategy to increase diversification and provide a hedge against inflation. Historically, the real estate industry indexes have shown a low correlation with the return of stock and bond investments. Well occupied properties with long term leases provide a very stable cash flow and can act like an annuity or similar low risk bond investment.
If your only experience with real estate is buying your home, building a real estate investment portfolio involves a very different mindset. Unlike the emotional attachment you have when purchase and maintaining your home, acquiring investment real estate must be an unbiased and objective exercise to identify an attractive investment return opportunity.
Like any well structured investment strategy, diversification of your real estate investment is an important consideration. Diversity in a real estate portfolio means geographical dispersion, different property types such as residential multifamily or commercial, and various stages of the real estate cycle such as investing in a growth market or established market.
Holding real estate for the long term will deliver the best results and provide the best opportunity for stable growth and attractive returns. Investing in hot markets or attempting to flip properties for a quick profit is very dangerous and in most cases fails to deliver consistent results. Although it may take a few years, a properly structure real estate project will generate reliable cash flow and equity in your property will compound rapidly.
Look to acquire in property in high demand areas that are under supplied. Areas with little or no available land for development and evidence of a short sale cycle on property available for sale are indications of a strong market. Often the best investment opportunities will be located in communities near large educational institutions or close to major employers.
Financing is a significant factor for acquiring and growing a solid portfolio. The proper loan product for the specific real estate investment is very important. The interest rate structure, loan term, principal amortization schedule, prepayment terms and financial covenants can be very different for each property. Select a lender or mortgage broker that understand your goals and objectives and will provide the financing needed to implement your strategy.
Also crucial in the success of your real estate investments is selecting the right property management firm to handle your property. Companies with a proven track record and bearing the proper designations from the property management industry associations are a good place to start. The right management company will maximize the income generated by your property while minimizing the property operating expense. As a result the net operating income and market value of your investment will continue to increase.
If you are interested in investing in real estate contact THE CABOT GROUP. Our firm is a full service commercial real estate firm that can assist you with acquiring, financing and managing your new or existing real estate assets.