Real Estate – A Key Ingredient In Your Investment Portfolio
by: Stefan Hyross
There are a staggering number of different investment products that are available to investors today. Each one comes with different risks and with these risks comes differing rewards. One can feel that in order to understand each type requires an advanced degree, but you can improve your odds of success by doing your research.
You may have been aware of some financial advisers or institutions talk in regards to having a diversified portfolio. The thinking goes that to hold different types of investments better protects your money and maximizes your profits. You can think of it as being a multi-pronged strategy to investing. Savings, stocks, and bonds are considered to be just one kind of investment.
The next kind of investments are known as commodities. Some examples of these are items like gold, silver and oil. They can bring in very high returns but high returns are accompanied by higher risk. Commodities are generally left to the experienced investor who has the ability to closely watch the market since they are very volatile.
Real estate has traditionally been a solid investment but not everyone has the capital to go out and start buying property. To apply the Toronto residential real estate market as an example the average value of a property is over $300,000 with commercial properties being even more. But there are other ways to invest by using Real Estate Investment Certificates or REITSs.
These companies have the job of buying interests in or properties like malls, motels and hotels, office space or mortgages. As an investor you are able to select which kind of REIT you want. Equity REITs are investments in property. The rents that are charged makes then money. To use Toronto as an example again you may have shopping areas with a Wal-mart, Home Depot, Payless shoes etc. that are all leasing buildings from the property owners. All together these Toronto properties are all making money from rents for the REIT and its investors. The second type of REIT involves the lending of mortgage funds generally to developers or property owners. If you don’t know which one you prefer you can choose to get a hybrid REIT which is a combination of the two.
One risky kindof real estate invest is known as an option. This is simply a purchaser is making what’s known as an “option for consideration”. The option entails an offer to buy a property as long as certain conditions are fulfilled such as financing or inspections. During this time the property is taken off of the market in return for a small amount of money as a deposit. There is a risk that if the conditions are not fulfilled the potential purchaser may be forced to forfeit their deposit. On the positive side the purchaser could earn a quick and substantial profit if they can quickly sell their option to a third party. carrying this out successfully means a thorough knowledge of the market and a fair amount of research.
It can be complex at times but the more you learn the better off you will be. Long term investing is the key and real estate has been shown to be a great vehicle for investors and even with the many possible risks involved it is thought to be the least risky when set side by side with other types of investments. This makes it is a vital component of any portfolio.