Real Estate as a Component of Your Portfolio

The housing boom of the past several years combined with inflationary fears has created a renewed interest in real estate investing. People may forget to discuss their real estate holdings with their financial advisor, usually under the belief that real estate should be viewed as separate from their investment portfolio. However, ownership in real estate is an investment just like stocks and bonds, and there are considerable planning opportunities that are unique to real estate holdings.

When viewed in the context of an overall investment portfolio, real estate can offer several key benefits:

  • Current income – Income has been the primary source of investment return in real estate

  • Capital appreciation – While secondary to income, real estate has investors also look for capital appreciation over time, and any realized price increase adds to the investor’s total return

  • Inflation Hedge – Real estate valuations tend to hold up well in inflationary periods relative to other asset classes

  • Volatility Reduction – Real estate properties are typically not traded on liquid public markets. Because of less frequent updates in valuation, many investors feel more at ease when invested in certain types of real estate where they cannot see the daily fluctuations in price like they can in the stock market.

  • Tax Benefits – In the United States, the ability to offset rental income with depreciation, as well as the opportunity to defer capital gains through 1031 exchanges leads to interesting planning opportunities for real estate investors

Is Direct Real Estate Investment for Me?

Many people’s first thought of investing in real estate is the outright purchase of a property – be it a secondary residence or a property dedicated to rental income such as a single-family home, duplex, or storage facility. These types of investments, known as direct investments in real estate, require high levels of investment capital and provide the investor with high degrees of control. The investor retains many responsibilities for the property, including securing financing, finding tenants, collecting rent, and ensuring the property is properly maintained.

The decision to directly invest in real estate properties is a deeply personal one. While there have been plenty of examples of people successfully doing so, having interest in being a landlord, the passion to oversee a property or portfolio of properties beyond your primary residence, and the tolerance for inconveniences (e.g., a water heater going out while you’re on a European adventure) should be driving factors in pursuing this approach. Many investors primarily driven by the potential to outperform other asset classes have fared poorly due to the intense effort required through a direct investment approach.

What if I Don’t Want to be a Landlord?

If the thought of being a landlord makes direct investment a non-starter, you’re not alone. Thankfully, there are several other ways to gain diversified exposure to real estate that don’t take the time and effort that direct investment requires.

Real estate investment trusts (REITs) and real estate operating companies (REOCs) are two types of companies with shares that can either be publicly traded on a stock exchange or privately offered to qualifying investors. These companies and funds often focus their investments in certain sectors of the real estate market, be it hospitals, apartments, or shopping centers. Investing in REITs or REOCs does not offer the same degree of control as direct investment but allows diversified exposure at much smaller capital levels without the burden of actively managing a property.

There are advantages and disadvantages to accessing these investments via public or private markets. Investing in REITs in the public markets requires the lowest level of initial capital, and numerous real estate or REIT-specific ETFs are available that offer investors diversified exposure to these companies. Additionally, valuations of public traded REITs, REOCs, and associated ETFs are dictated by market forces and can therefore trade at significant premiums or discounts to the net asset value (NAV) of the underlying real estate properties. On the other hand, investing in private REITs or REOCs typically have higher capital requirements and may be limited to investors that qualify as accredited investors or qualified purchasers. However, returns in private markets tend to be much smoother because entry and exit points are generally fixated at NAV.

How Wealth Advisors Can Help Real Estate Investors

Whether an investor wants to personally buy a rental property or access real estate in a more “hands-off” approach, a financial advisor can assist to make sure your real estate holding both helps with your financial goals and coheres with the rest of your investment portfolio. At Regent Peak, we can analyze your unique situation to craft a personal strategy for your real estate ambitions. When it’s time to sell your holding, we are willing to work with your CPA or attorney to utilize various strategies, such as 1031 exchanges, to either defer taxes, diversify your position, or in some cases solve estate planning concerns as well. We look forward to talking with you about your options with real estate.

DISCLAIMER: Regent Peak does not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.