Now may be the time to get into the game
Real estate has its market cycles like any type of investment, and lately it’s been getting bad press. Investors may have second thoughts about putting money in this asset class right now, what with all the talk about a bursting housing bubble, the glut of unsold condominiums and homes, declining property values and the growing number of foreclosures.
But this may mean that it’s an opportune time to get into real estate. "Owning some paid-for, income-producing real estate, in addition to having a solid portfolio of other investments, can be a very good thing," says radio talk-show host Dave Ramsey, author of "The Total Money Makeover."
For investors willing to invest for the long term, owning properties "can be a path to financial freedom for many," says Ramsey.
Single-family homes make good first properties because they don’t entail the same hassles associated with multiunit apartment buildings.
"Single-family homes, which can be easily turned into rentals, are also much more affordable than, say, multifamily units such as duplexes, triplexes and so on," says Robert Sheehan, consulting economist for the National Apartment Association.
Home sellers are now also more realistic with pricing, so the current housing market offers a lot more choices for buyers, who can get better values for their money, says Thomas Stevens, president of the National Association of Realtors.
For those prepared to take the plunge, rents continue to improve.
Last year, rental rates rose more than they had in recent years. "Overall, the increase was around 3.5 percent, and that’s the highest rate of increase since the late 1990s," says Sheehan, who predicts that rent growth in the year ahead will likely move in line with or slightly above inflation.
Not everyone wants to be a landlord, a role that requires dealing with late-night phone calls. For those who lack such mettle, other real estate investments exist.
Real estate investment trusts (REITs) are one alternative. These are publicly traded stocks of companies that own and often manage several commercial properties. Because the asset class has little correlation with other common stocks, they provide diversification in a portfolio.
However, REITs do have their ups and downs. The individual investor who wants some exposure to commercial real estate today, for example, would do well to choose a REIT mutual fund in lieu of an individual REIT stock, says John Coumarianos, a fund analyst at Morningstar. "Something like the Vanguard REIT Index Fund would be much more appropriate because it is a much more diversified investment."
REIT funds shouldn’t comprise more than 5 percent to 10 percent of an investment portfolio. Coumarianos suggests investors buy into a REIT fund very gradually – "dollar-cost averaging and only buying on dips" because of their outsized performance in recent years.
Investing money in a tenant-in-common (TIC) property is another alternative some might want to consider, says Tom Milana, CEO of Milana Real Estate Investing Group. "TICs provide a way of owning institutional-grade real estate, with attractive income and appreciation potential, at a price investors can tailor to their individual needs."
Tenant-in-common properties are a relatively new phenomenon. These properties provide investors with passive cash flow. For a base investment of $100,000, TIC owners get access to otherwise unaffordable properties such as office buildings, apartment complexes or hotels in various geographic regions.
Although TICs can be a viable alternative to owning a real estate property on your own, prospective investors need to be careful. They can be good long-term investments for those with an adequate reserve of capital and an understanding of the risks involved, but they’re inappropriate for short-term, risk-averse or cash-poor investors.