6 WAYS TO DIVERSIFY YOUR REAL ESTATE PORTFOLIO
We all know real estate appears to be one of the best investment sectors right now. We all know that diversifying our portfolios is important. So, what options are available for enjoying the safety and performance benefits of diversification within the real estate asset class?
In this previous post we discussed ways to hold real estate for heirs with less risk and hassle. We also covered some of the types of properties you may want in your real estate portfolio for building a legacy here. However, there are a variety of ways to invest in property, and having a balance certainly offers some protections and advantages. This is especially true when it comes to thinking about estate and legacy planning. Let’s take a look at six of them…
Publicly traded REITs have been popular for those wanting the ease of stock market investing. They became more popular as some big funds swooped down on the US property market to gobble up large amounts of distressed homes to be converted into rentals. In spite of rising interest rates which can hamper REITs, there may be some value to be found here. Just be keenly aware that these types of REITs do not offer diversification from your stock portfolio and the high volatility they can be subject to.
Real Estate Businesses
Buying more real estate related public stock ought to be approached extremely cautiously right now. This is especially true given the giant Wells Fargo scandal, and its broad acceptance as the status quo. However, the recent PATH Act brought in more tax breaks and protections for those that invest in certain small company stocks. These can be highly risky, but may offer the most growth potential.
Prime income producing properties are probably the most common type of investment held by families looking to grow their estates and pass on a strong legacy. Everyone can benefit from having a portfolio of these income producing assets. This may include single family homes or condos, commercial properties, or mixed use properties.
Private lending has been growing in popularity and is likely to continue to gain traction for some years. This is an alternative to direct investment in bricks and mortar. It means providing your capital to other investors who do most of the heavy lifting in exchange for an attractive return, and often steady passive income stream. With Trump hoping to undo some tight restrictions around this sector more opportunities may emerge for private investors in the months ahead.
Note investing is essentially another form of private lending. However, instead of financing new loans sophisticated investors purchase existing real estate notes and mortgages, often at a sizable discount.
One common theme we have seen throughout American history and its most loved wealthy families and personalities is the investment in developing and constructing new buildings. For some it has been lavish hotels or condominium buildings. For others it has been libraries and parks. What will you build and add to the landscape as a legacy project?
TYPES OF REAL ESTATE INVESTMENT FOR BUILDING A LEGACY
Which types of real estate investment may be best for building a legacy estate?
Real estate investment can be one of the best tools for preserving, growing, and optimizing an estate, and creating a legacy that will go on giving during your lifetime and beyond.
The exact mix of investments, and structures which are best for your individual portfolio are certainly a personal decision. They will depend on what you are starting with, your anticipated timeline, and your age and health, and that of your heirs. However, the following are some staple selections which can be a great fit for many estate plans.
The Family Home
The most common type of property in most estates is the family home. The associated tax breaks and legal shelters this asset offers is one of the reasons that sophisticated individuals often invest so heavily in their primary residences. The one caveat here is considering what heirs will really want to do with that property after you pass, and perhaps your long term housing needs. Should it be kept, or will it become a burden? When is the optimal time to resize your residence?
Second Homes & Vacation Homes
These types of properties can often offer a hybrid combination of the benefits of pure investment real estate and personal residences. They can also offer geographic diversification for your portfolio, and often an equity building head start on a retirement home. This may also provide an advantage in shifting residency to a safer and lower tax environment later.
Higher education is only getting more expensive, and so is student housing. If your children are still planning on attending college it may be beneficial to secure them housing near to education. Any additional income or equity produced by the property could offset education expenses as well.
The recent and current real estate and finance environment has left a significant void in lending and benefits of leaving money deposited in the bank. This has created a new trend and more advantages in parents financing their children’s starter homes. It reduces the burden and credit hit for children, while helping to get the most out of capital for parents. Explore different options for gifting down payments or providing private mortgage loans, and the tax breaks.
Commercial Income Properties
With so much of the above invested in the residential market it can be wise to diversify into commercial properties for income and wealth preservation. Retail, office, multifamily, and mixed use properties can all offer diversification as well as passive income for principals and heirs for the long term.
Future Development Sites
Land, infill lots, and prime buildings which are ripe for future development can balance other assets by providing potential for bigger wealth leaps and cash gains. These investments can be staggered to deliver at different life milestones while minimizing holding costs and management now. You don’t have to be the one to develop or build either. You could sell the opportunity on, or partner with someone else.
All of the above may be great choices for your estate and portfolio. Leveraging 1031 exchanges, trusts, and self-directed retirement accounts for limiting liability and taxes can make these options even better too.