About Real Estate investment

Traditionally as one of the earliest alternative investments, real estate plays an important role in institutional and individual investor portfolios globally.

The size of the real estate market equates to roughly one-third of the world’s wealth..

Historically property has been viewed as the primary alternative to traditional stock and bond investments.

Real estate investment is a good risk diversifier in the traditional stock and bond portfolio because historically it experiences lower volatility than other asset classes and thus real estate can be a good income enhancer.

BENEFITS AND DRAWBACKS OF INVESTING IN REAL ESTATE

Benefits

• Mortgage interest, property taxes and other expenses are tax deductible.
• Mortgage loans permits real estate borrowers to use more financial leverage than is available in most securities investing.
• Real estate investors have direct control over their property and may take action, such as expanding or modernizing to increase market value. In contrast, an investor who owns a small portion in equity of a publicly traded company has virtually no voice in the management of the company.
• Geographical diversification can be effective in achieving risk-reduction benefits.
• Returns average lower volatility in comparison with returns to public equities.

Drawbacks

• Real estate is not easy to divide, may involve large risks for investors.
• Information costs high because each piece of real Estate is unique.
• Real estate agents charge high commissions relative to securities transaction fees.
• Operating and maintenance costs high (maintenance, Management expertise, administration)
• Risks neighborhood deterioration which is beyond owner’s control.

TYPES OF REAL ESTATE INVESTMENTS

Investors may participate in real estate investments directly or indirectly.

Direct ownership includes investments in residences, business real estate, and agriculture.

Indirect investment includes investing in:

• Companies engaged in real estate ownership, like developers, property managers, builders, Real Estate Operating Companies ( which are in the business of owning real estate assets as office building, hospitals, business parks, etc.)
• Real Estate investment trusts (REIT’s) – which are publicly traded equities representing pools of money invested in real estate properties and /or real estate debt.
• Commingle Real Estate Funds (CREF’s). Professionally managed vehicles for “pooled investments” in real estate properties.
• Infrastructure Funds – which in cooperation with governmental authorities make private investment in public infrastructure projects – such as roads, schools, hospitals and airports – in turn for a right to a specific income stream. Roads, schools, and hospitals.
  
  

In addition to its potential to add value through active management, real estate has historically been viewed as an important diversifier.

Reference: John L. Maginn, et all. (2007) CFA Institute Investment Series:- Managing Investment Portfolios. 3rd Edition

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