Real Estate Is Still A Safe, Wise Investment
(The current real estate market has made just about everyone involved nervous, although it looks as if a buyer's market is emerging. Real estate prices are at an all time high and interest rates are the highest this decade.)
With all that being said, real estate investing is still one of the wisest financial plans.
The September 10, 2006 article, "Real estate still the real thing," written by Linda Stern in The San Diego Union Tribune, explains how real estate investment trusts (REITs) will strengthen your financial portfolio even more than top mutual funds.
"Real estate is expensive these days, but it's still a valuable commodity."
It's fairly obvious to state that the real estate market thrives in spurts, such as the previous five years (the "boom"), when the average annual home price increase was almost 21 percent, according to the National Association of Real Estate Investment Trusts and FTSE, a British index publishing company.
According to Morningstar, real estate mutual funds (trusts) have an average return of 16.57 percent this year, which ranks best in the firm.
"But even when real estate stocks and funds aren't racing up in price, they tend to pay you in solid dividends that are really rent payments collected by the companies you invested in. Even after the last rip-roaring five years, REITs are paying about 4 percent in dividends, according to their trade association."
Now, the real challenge for investors is how to incorporate efficient real estate trusts into their portfolio, at the right time, in the right way.
Stern offers a few helpful tips in order to accomplish this.
"Don't buy another house and think you are diversifying." A second home is a great investment for leisure time with family and friends and you may profit from it, but it is not very diversified or liquid.
"For investing purposes, you are probably better off with a diversified real estate investment trust, or a mutual fund or exchange-traded fund that owns commercial or retail property."
Even though the real estate market for single-family homes is softening, the commercial market is alive and well. "'There is very little correlation that I've ever seen between residential real estate and commercial real estate,' says Don Wood, CEO of Federal Realty Investment Trust, one of the most successful long-term REITs."
Since real estate is expensive, especially right now, you should be careful not to buy too much. "'It should be a small percentage of a very well-diversified portfolio,' says David Lee, who manages the T. Rowe Price Real Estate Fund, a Morningstar favorite."
Most financial advisers coach their clients not to keep more than 10 percent of a diversified portfolio in real estate.
The next thing you should have an understanding of is where your real estate trusts should be invested.
"The worst thing about REITs and the funds that hold them is this: Their payouts don't qualify for the low 15 percent tax that applies to most stock dividends. So you're better off tucking your real estate investments into your 401(k) or tax-favored Individual Retirement Account."
There are many options of how to invest in or with REITs. Like any major financial decision, you should take your time and do you homework before signing or agreeing to anything. All investing has some gamble factor to it, so you want to be knowledgeable and decisive when you make your financial decision.