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House, Home or Investment?4 min read

Jan 30, 2019 - John Osbon ( 6 mins to read)

John Osbon

We have made comments before about investing in real estate. This week our entire article is devoted to investment real estate. The goal of allocating money to real estate is largely the same as putting money into stocks. The investor wants growth and income. The similarities end there.

In the news recently

Real estate is often in the news, with plenty of mixed messages for current and potential investors. For instance, Ken Griffin of Citadel grabbed headlines in January by buying the most expensive home in the United States for $238 million – I think it is a vanity purchase (not his first). Meanwhile, there’s a growing chorus of “experts” who say the real estate investment game is over. They point to rising mortgage rates. In fact, rates have fallen in the last 90 days.

Other property bears point to 15 years of appreciation, “therefore it is time to go down.” Again, I disagree — investment markets can go up for a long time. Fifteen years is not that long. Bloomberg had a lengthy article on The End of the Global Housing Boom. Toronto, Manhattan and Sydney are headed for trouble according to the authors. They claim the “boom is over,” meaning the pace of price appreciation is slowing from its former frantic levels. To me, that sounds like a good real estate investment environment, not a great one.

Lastly, there are real estate “opportunity zones” encouraged by the Treasury Department. These opportunity zones are new as of 2018. Clearly, investment real estate is a lively, active area where a lot of money is moving around. Ask us if you would like to know more about opportunity zones.

The value of difference

Of the many factors that attract investors to real estate, diversification may top the list. With unique risk and return characteristics, its value often moves independently of stocks, bonds or other investments. For that reason, real estate has been an essential investment of Osbon Capital since we started in 2005. We’re not alone; research into family offices by The Economist shows an 18% average allocation to real estate among the wealthy. (Family Offices: A More Personal and Private Approach – Jan 23, 2019 – Max Osbon)

REITS, ETFs or private real estate?

What are your options for investing in real estate? You can maximize diversification via a public fund such as a real estate ETF or a REIT, through which you might hold a stake in dozens or hundreds of properties across many geographic markets.

If you are not going to use a fund, you do have some work to do and extra steps to take. We have clients with condos in Boston, multi-family housing on the North Shore, Cape vacation properties, homes in Texas to Japan, and small hotels in Florida and other states. All of these private properties take work, like finding tenants, collecting rents, vetting repairmen, responding to emergencies, filing tax forms and maintaining good insurance records. Some investors like this type of work; others pay management companies to operate the properties.

Private investors must also find properties and close deals at sensible purchase prices. Most of our clients can do this easily because they also live in their investment neighborhoods. It’s more difficult if you want to diversify across multiple locales.

Risks for the private investor in private real estate

All investments have risks. Real estate is no exception. First on the list is liquidity, or lack thereof. It’s hard to sell real estate quickly at a fair price. That might be okay if you have other sources of easily accessible cash.

The next risk is valuation. Real estate prices can be just as volatile, if not more so, than public stocks. Twenty percent or greater price moves are common, sometimes driven by unforeseeable outside factors such as a large corporation moving to town or a natural disaster that damages property or infrastructure.

The third risk is technology obsolescence. A newly constructed or fully renovated property has the latest and best technology. If you have bought a new property I imagine you are attracted to the new HVAC, wiring, plumbing, appliances surfaces and smart notices. I was. Will that technology command a good value in ten years? The future value of your real estate technology will significantly affect the exit price.

There’s another big difference versus stocks — real estate is a depreciating asset. Roofs and flooring must be replaced. Parking lots get repaved. Lobbies get remodeled. As buildings age, they can become more and more expensive to maintain, potentially reducing annual returns and resale value.

Be careful and thoughtful

Does investment real estate fit in your portfolio? We can help you explore that question, identify the right kind of properties and structure ownership appropriately. If you would like to see how we do it please give us a call.

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