Why Real Estate Offers a Better Return on Investment

Beach Playa Del Carmen

In seeking out the best ways to invest money, investors worldwide are turning to alternative asset classes like real estate investment to increase their return on investment (ROI) in what has become a low – sometimes even negative – interest rate environment. According to the Wall Street Journal, the dismal current rates are driving more investors than ever before into real estate and other alternative investments that provide annual yields. 

Although most people are still planning to retire at 65 after receiving 6-7% returns on their investment portfolios, after factoring in a decade of inflation at -1.6%, that number suddenly drops to 4.6%, which is where most firms are getting their abysmal 5% average… Translation: Not enough for most of us to enjoy a comfortable retirement!

 

Investing Money in Real Estate

In a recent survey by Bank of New York Mellon Corp., more than one-third of investors indicated that they would increase allocations to alternative investments, which is a term that includes a wide variety of real estate holdings, including commercial real estate, REITs and FIBRAs, investment properties, land banking, vacation homes and turnkey vacation rentals like luxury condos near the best beaches in the world.

“Negative rates are encouraging investors to go further afield,” stated Simon Smiles of UBS Wealth Management in a recent Wall Street Journal interview. “That means increased interest in alternative investments, such as private equity, real estate, infrastructure, private debt and hedge funds.”

Real Estate Investing Basics

Although the first thing that comes to mind when you think about real estate investment is buying property or owning a home, in reality there are a wide variety of other routes for building wealth through real estate-related investing. From owning vacation home rentals or other rental properties, to land banking to REITs, real estate is one of the best ways to invest money if you need to diversify and protect your portfolio from the ups and downs of the stock market. 

“Real estate has a low, and in some cases, negative, correlation with other major asset classes – meaning, when stocks are down, real estate is often up,” wrote Investopedia.

money

In fact, according to data from Robert Shiller, Sterling Professor of Economics at Yale University, residential real estate prices rose while everything else was down in 14 of the previous 15 bear markets – going back all the way to 1956. What this means for investors of all ages – whether you are rethinking retirement, hoping for an early retirement, or just getting started in the workforce, is that buying real estate can lower a portfolio’s volatility and provide a higher return per unit when risk is factored in.

Real estate investments are also less dependent on the integrity and competence of investment bankers and financial advisors, which enhances its overall ability to provide a handsome return on investment. Even REITs and FIBRAs are somewhat protected compared to other stock market investment vehicles, since REITs require a minimum percentage of all profits to be paid out in dividends. 

“[Real estate] can be a significant counterbalance to other instruments, as well as a source of income and, eventually, appreciation,” wrote Investopedia.

Buying Real Estate With an IRA

Many investors still don’t realize buying real estate with an IRA is permitted, mainly because very few mainstream financial advisors are willing to volunteer this information, which would lead many investors to consider this alternative investment option – especially when the stock market is underperforming so badly! If you examine the Self-Directed IRA real estate rules, however, you will see that it is perfectly legal to buy real estate with an IRA account. 

“One of the big benefits of buying real estate with your IRA is tax deferral,” wrote International Living“It has been legal for over 30 years to buy real estate with a Self-Directed IRA – and it’s much simpler than you might expect.”

real estate house

Still, it’s essential to understand the do’s and don’ts before you buy, so here’s how it works: First, keep in mind that you won’t actually be buying real estate – your IRA will. Although this might appear to be a minor difference, it’s important because it protects your investment from unnecessary taxation. 

“To pay for your purchase, an invoice and authorization must be sent to the custodian of your Self-Directed IRA, who will then release the funds for the purchase,” wrote International Living.

In other words – NEVER pull the money out of your IRA to pay for the purchase of real estate, because that would be viewed (and taxed!) by the IRS as ordinary income. Also, be sure to select a large, established custodian for your Self-Directed IRA. There are currently around a dozen or so major companies that offer Self-Directed IRA accounts and can hold alternative investments like real estate. Select one that has a long, established history of complying with the rules, especially if you are investing in real estate overseas or in a foreign country.

“Find reputable tax and legal professionals to work with you on both sides of your foreign real estate purchase,” wrote International Living“People familiar with Self-Directed IRA regulations and the real estate regulations in the foreign country.”

Real Estate Investing in 2017 and Beyond

As the first quarter of 2017 comes to a close, the latest research suggests that there is a growing trend among investors to seek out alternative assets, such as real estate, with no signs of slowing down. 

“The alternative investments asset class is now bigger than it has ever been, representing a total of $7.7 trillion,” wrote CAIS Capital LLC. “Investments in the alternative asset class experienced growth of $300 billion in 2016.”

investing

According to Preqin, a leading source of data and intelligence for the alternative assets industry, real estate is attracting the largest proportion of investors at 61%, compared to other options, such as private equity (57%) and hedge funds (51%).

“95% of real estate investors stated that their real estate investments had met or exceeded their expectations in 2016,” wrote CAIS Capital LLC. “The opportunity for growth in the real estate asset class remains substantial.”

The bottom line: Regardless of your age or income level, real estate offers a wide variety of investment options that can significantly increase your return on investment while mitigating risk.

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