Peter Boys, Boys Financial Services

Real Estate Investments

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Looking for income? Some other options to consider

With today’s stock market volatility and 10 years of no real investment growth in equities, clients are looking for alternatives.  People want returns, but fixed income isn’t delivering, and many are frightened of further investments in equities.  An alternative to consider is the benefits of real estate investments to round out your portfolio.  It can provide long term capital appreciation or an income stream, depending on your need.

Seeking yield? Think real estate.  This is an alternative asset class that represents a third of the world’s wealth.  Real estate generally, and commercial real estate especially, can provide a hedge against inflation and reliable cash flow.

The pros of private real estate.  Private real estate might be suitable for people looking to offset the current volatility with global stock markets.  But as an asset class, it’s not without risk, and it’s governed by a complex set of rules.

Get property ownership right, or pay too much tax.  Whether it’s a co-ownership of a family cottage with a sibling or of an urban rental property, the legal structure of the ownership agreement plays a key role in determining tax implications.

REITs can offer long term stability.  Real estate investment trusts (REITs) are an investment anomaly, especially for anyone accustomed to following corporate earnings.  REITs generate poor return on equity.  On the flipside, tax treatment of the trust distributions can be useful. Consider that institutional real estate investors know that REITs are too closely correlated to the equity markets on which they are listed.  So for these managers, nothing beats the real thing, a portfolio of physical real estate holdings.

What about investing in timberland?  Few investors are aware of this asset class which involves investing in either tree farms or managed natural forests.

Commercial mortgage funds built on yield.  In the last few months there has been a lot of sales activity in central Alberta including Stettler, as wealthy investors buy up industrial properties producing rental income.  This is a spin off from the oil patch boom driven by service and manufacturing firms looking for space to work out of.  Canada’s big banks have commented that it’s a good time for companies to be in the commercial loan business.

Why real estate as an inflation shelter?  Real estate can be a hedge against inflation because rents generally rise with inflation.  But not all real estate investments hedge inflation well.  Remember – location, location, location!

Real estate can help smooth portfolio volatility.  Real estate is on the fixed income side of an asset mix which can help offset volatility on the equity side.

Positioning real estate in your portfolio.  In determining how much real estate investment should be included in your portfolio, a simple rule of thumb is a maximum of 20 to 30% of your investable assets.

Before jumping in to these investments, your financial advisor needs to have a good understanding of your overall tax picture, your income needs, time horizon and the future needs of your heirs.  Real estate can be a great income provider, but requires diligent work to know for certain whether this type of investment is suitable.  Generally, these type of investments are better suited to investors with long term time horizons.

Unfortunately, many people are saying their considering converting their equities to cash, thereby locking in their losses in the process!  They should first sit down with their advisor and see if there are other investment or income producing options available as an alternative.

 

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