Are you an executive who just retired after being in corporate practice for several years?
Or an entrepreneur who just sold a business? Perhaps you are a new graduate who received an inheritance unexpectedly? Or, you may be the lucky one who won the biggest jackpot in the lottery!
Whichever of the above situations you find yourself in, you are most likely asking yourself one thing: what will you do with that financial windfall? For sure, you are interested in that proverbial “making money work for you” so you don’t have to work for the money.
Traditionally, individual investors would invest in stocks and bonds. But there is actually an asset class – an alternative investment – that is rising in importance because of its growing performance. This is none other than Real Estate.
Real Estate is listed as one of the top alternative investments for 2016, according to Prableen Bajpai, CFA (ICFAI). It is in fact the top alternative investment choice of millionaire investors based on Morgan Stanley Wealth Management Investor Pulse Poll Report in 2014.
First, what should you consider about stocks and bonds?
- Easy to get in, easy to get out. Capital requirement is low and liquidity is high.
- The stock market allows you to leverage and offers high diversification because you can invest in different companies across several industries.
- Stocks are subject to fluctuations and volatility. A 30-40% drop in a single trading day is not uncommon. You must have a huge risk appetite if you want to get into the stock market. (Did you know that the 2008 financial crisis caused 5,000 suicides in Europe and North America?)
- Bonds, on the other hand, offer more stability, and can shield you from inflation.
- Still, both take time to reap the returns as stocks and bonds are really for the long-term investor. Financial advisers recommend a minimum of 5 years. Treasury bonds take 10 to 30 years to mature. The question is: will you still be strong enough then to enjoy its yield?
Now, why Real Estate?
- Its value appreciates so your capital will appreciate. The latest data from Zillow Research shows that annual US home values are up by 4.8%. This is 5x the latest inflation rate. This means that your capital is not only protected, it also multiplies.
- It also offers a higher rate of return. According to the US Real Estate Dow Jones Index Report, the annualized total return is 8.95% for 5 years. This compared to (US Treasury) Bonds Rate of 1.18 for the same period.
- Aside from your primary residence, there are a slew of real estate options you can invest in and make money from: commercial properties, condominiums, vacation homes, even land. Think of the vast rental market as an opportunity because people are constantly looking for a place to settle as they work or study, or simply raise a family. And rental income is regular yet passive. Especially if you choose the location well.
- Ultimately, Real Estate ownership gives an individual a sense of self-fulfillment, a sense of pride that you have indeed “arrived”. For most, owning a home is the great American dream. Indeed, for the majority of us, buying a home will be the largest single investment we make in our lifetime.
- It is also a concrete proof of your wealth. A legacy that you can pass on to the succeeding generations.
What else should you know about Real Estate Investment?
- It requires a large capital or a high cash-out.
- We all know what Benjamin Franklin said about death and taxes. Well, Real Estate is one alternative investment that is not exempt from taxes.
- You should also be selective of location and the property condition. It is not only taxes that you have to pay, you also have to budget for: renovation, maintenance, and insurance.
- If there will come a time that you need funding for whatever purpose, it takes time to sell Real Estate. It is illiquid unlike stocks and bonds. Marketing the property, finding a buyer, and negotiating between buyer and seller takes months to finalize.
- If your objective is to rent out, it is also not easy to place a tenant. And as a Landlord, you sometimes have to deal with problematic tenants (i.e. tenants who call you to complain about every little thing or tenants who destroy your property. [Read: The Landlord’s Guide to Dealing With Problematic Tenants.]
The bottom line is you cannot easily cash in on real estate unless you’re working with a reputable Realtor that specializes in turnkey investments. This way, you will really have passive income and avoid the hassles of actively managing property. After all, it does take a lot of work to maintain a house in tip top shape and earn from it at the same time.
The key investment principle to remember is that you should not put all your eggs in one basket. You must diversify to maximize your income and to minimize your loss.
So as to the question – is real estate the best alternative investment? The answer is a resounding YES. Cash-out may be high but cash flow is guaranteed. Real Estate is, and will always be, an integral part of the portfolio of a smart investor.