I have some Good News and bad news, about real estate investing.
First let us start off with the term “real estate investment” can be… ambiguous, guess you can say, unless someone defines what kind or real estate they are talking about. For this blog we are going for investment purposes, there are at least a dozen ways, most likely it is safer to say more than a dozen ways, for an average investor to bring real estate assets into a portfolio, and well lets face as we all know, everyone that is successful has a real estate portfolio.
Now believe this or not there exist real estate-backed ETFs (exchange-traded funds) and similar instruments that are virtually identical to buying shares of a common stock or a mutual fund, or hedge fund if you will. And in fact a lot of mortgages and things, are traded on the stock market, HUD does this, but that is in a different blog. This kind of real estate exposure is typically not what investment texts and experts mean when they are talking about real estate investing. For most purposes that they speak of it is putting money into the actual REAL ESTATE, which involves the actual purchase of land, structures or both.
When someone buys a piece of commercial or residential real estate, there are notable advantages and disadvantages that should be examined before a commitment is made, in layman terms a lot of home work,, and research to be done. Now let get down to the Good news, and Bad news, the Following are some of the advantages and disadvantages of real estate investment, in a general sense. So lets get down to it! what do you say?
One Advantage – Sweat equity
One of the best things about owning real estate is that the value of the asset is at least it can be partially controllable by the owner. In other words, an owner can repair a roof, put on a fresh coat of paint or otherwise beautify a house or building. Even if the owner hires contractors, whatever is done to improve a property has the potential to increase the asset’s value proportionally. Unlike stocks, bonds and precious metals, for example, an owner of real estate has some power over the improvement of the investment itself. These advantages applies to very few asset classes with the exception of real estate, classic cars, and a few types of collectables and antiques.
A Second Advantage – Diversification
Everyone knows that many successful investors diversify their portfolios by purchasing stocks and bonds, etc. in different markets or by acquiring precious metals as a hedge against inflation, proof is this is when the great depression hit. What did people do? How ever it seems that fewer consider real estate as a way of diversification, partly because they think cost of entry is higher, which can be true, but also because the average investor tends to not know very much about the RE market, how ever the successful ones do invest in real estate. There is a certain amount of “real estate phobia”, for lack of better terms, in part due the real estate bubble that busted, and other things, and that certainly has an impact on the willingness of many to purchase real estate.
But, even a single, small real estate asset can be an ideal way to truly diversify a portfolio that is otherwise filled with stocks, bonds and a smattering of gold and silver, diamonds, black diamonds, etc.. that being said that leads us to our…
Third Advantage – Not tied to securities markets
Compared to the securities, real estate is generally untied to what the major world markets do. Unlike stocks, bonds and precious metals that go their own way and have their own cycles. Real estate assets, are for the most part, isolated from the ups and downs of Wall Street fortunes, and crashes. In this respect, real estate as an investment is similar to gold and silver in that it can be on an upswing when the stock market is headed south. For example, in inflationary times, real estate investments tend to do quite well, even when other asset classes are performing poorly. And like Gold there is only so much of it. This leads into out disadvantages…
One Disadvantage – RE can be a Challenge to Acquire
this can be for several reasons like cost and/or availability. Some times it can be difficult to buy several real estate assets, or properties, that have diversity amongst themselves. Which is in part because the average cost of just a single piece of real estate can be much higher than the cost of a group of stocks or even a few ounces of gold, also RE assets can be a challenge for the average investor to buy, especially when more than one is required for a balanced portfolio. Then it gets into managing if you are keeping them to rent out, and various other factors. Which brings us to our 2nd disadvantage.
Second Disadvantage – Management and Maintenance Costs
Whether an investor hires a management company to take care of day-to-day administration of property or they chose to do this them selves, there can be a significant cost to maintaining a property and dealing with tenants, especially if it is just one unit, or the owner lives far away or what have you. . This type of expense, in both time and money, is rather unique to real estate and needs to be considered beforehand. An investor would have to figure a Profit and Loss or CAP rate for the investment(s). THat brings us to the next Disadvantage.
Third Disadvantage – Measurement of results
Because every real estate asset, or deal is, to some extent, unique, it can be nearly impossible to measure performance on a regular basis. Let us say for example, a small office complex in a major city returns 8 percent on investment for a given year, is that higher or lower than it should be?
There is no real yes or no answer because that particular office building in that exact location can’t be compared to one just like it across town, or even to a different one nearby, in lay man terms, you have to compare apples to apples oranges to oranges. Measuring the performance of RE assets can be somewhat of a guessing game, especially for large commercial properties that are one-of-a-kind structures, rule housing, etc..
As with any other asset acquisition, one should do considerable home work before committing money to a real estate asset. We at BMW Properties can defiantly help with all this, we do the heavy lifting, so all you have to do is a go to the mailbox and get checks.
While just one RE asset can be a huge plus for a standard portfolio, it should be stressed that real estate is unique in many ways and demands more due diligence than most other kinds of investments. By doing research, and consulting with experts, someone can be more certain that a particular real estate purchase is a wise move.
As a side note for those who have spoken with us at BMW Properties you have may have herd us say, when you ask us to help with your situations, it depends this would be in part why we say this.