The incredible stock market volatility we’ve seen recently is an important reminder that when you invest in stocks and mutual funds, you are likely to see a significant decrease in your wealth overnight. If you are not comfortable with this reality, you might consider augmenting your portfolio with real estate investments.
When considering the myriad of commercial and residential real estate investments you could make, it’s helpful to evaluate each based on two criteria: income potential and value growth potential. In a broad sense, income potential is the amount of cash flow you will get from investing on a monthly or annual basis, and upside potential is the amount the real estate asset you own could appreciate in value. over time.
For those looking to augment a portfolio, here are three possible real estate investments to consider.
Real Estate Investment Trusts (REITs)
REITs are companies that own a variety of residential or commercial real estate assets. When you start researching REITs, you’ll see that there are many different types, from equity REITs, which own residential or commercial properties, to mortgage REITs, which lend money to homeowners themselves. or own mortgage-backed securities.
Just like you can buy Apple stock, you can also buy REIT stock on the stock exchange. Buying a REIT has the potential for significant long-term value growth, but trading REITs to generate short-term cash flow carries risks similar to those you’ll find with stock trading.
This useful article I read recently on REITs offers a great deal of detail on why you should at least consider augmenting your portfolio with this investment vehicle. I would also add that there are currently opportunities to consider in the REIT market, especially as REITs that own residential mortgages has gone down in value noticeably in March.
Private Commercial Real Estate Investments
In recent years, private commercial real estate investments have emerged. Like REITs, these investments have significant potential to grow in value over time, but are not designed for short-term buying and selling that can generate cash flow.
Although the current pandemic is having a significant impact on the commercial real estate industry at this time, it should be noted that the average return on private commercial real estate over a 25-year period is 9.4%according to the National Council of Real Estate Investment Trustees.
I’ve written extensively about creating wealth through income properties. Here I will simply add that with mortgage rates continuing to hover around historic lows, owning rental property will continue to be an attractive investment in many US cities.
Income properties generate cash flow from tenants, as well as growth in value as the value of the property increases over time. I’ve been an owner for over a decade in Boston, and I can say from personal experience that this dual bottom line provides owners with unparalleled investment stability. And while there’s a lot to be done to maximize investment property returns, the time and effort spent is worth it.
If you’re already planning to move this spring and you have the equity in your current home, you might consider turning the house you’re leaving into an investment property instead of selling it. You may find that you are able to refinance your home to pay the down payment on the house you want to move into and start renting it soon after you move out.
If owning a second property is not in the cards, I often encourage promising investors to consider adding an addition to the current home or finishing the basement and treating it as an investment property. This type of renovation would definitely add value to your home while generating cash flow from long-term tenants or short-term vacationers.
The current economic climate offers an important reminder that putting all your investment eggs in one basket can lead to a bumpy ride. If you diversify your investments into stocks, bonds, and mutual funds, as well as commercial or residential real estate, you’ll put yourself in a better position to weather down markets and build wealth more predictably.