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Property ownership can add valuable diversity to your portfolio. It's common for retirees or those nearing retirement to have accumulated valuable real estate such as rental property, a vacation home, a farm or ranch, raw land, or business property. Indeed, roughly 30 percent of retirees own some kind of investment property. Should retirees hold on to real estate as their portfolios generally become more conservative over time? If so, how should they hold it? The benefit of including real estate in a portfolio has become clear during the current market decline. For example, while most stocks plummeted in 2000, real estate investment trusts (REITs), which buy and manage investment properties such as hotels and shopping centers or which hold mortgages, returned nearly 26 percent. Even through most of 2001, REITs were up almost 7 percent while other stocks still struggled. The general lack of correlation between stocks and REITs (which performed poorly in 1998 and 1999 while stocks skyrocketed) is why real estate can greatly reduce a portfolio's volatility. And retirees, whose portfolios need to see them through 20 to 30 years or longer, need this type of investment diversification just as much as younger investors. REITs as a whole produce relatively healthy incomes, and according to figures from the National Association of Real Estate Investment Trusts, the dividend yield on them averaged more than 7 percent annually for the last seven years. What's more, there is additional potential for price appreciation if the real estate market is in your favor. If you already own investment real estate, whether inherited or accumulated over the years, the first step is to get a professional valuation of the property. A present-value analysis, for example, would compare the rate of return on the property vs. the risk-free rate of return you might earn from a treasury security. You might find you would do better to sell the property and invest in something with higher earning potential. Of course, owning real estate often involves nonfinancial factors as well. An inherited family farm may produce insignificant rental income, but you don't really want to sell it to strangers because you want your children to inherit it. The same may be true of other rental properties. In this case, you really should talk to your heirs to determine if they want this property. If they live far away, managing the property may be a concern for them. In that situation, it might be better to sell the property and seek more liquid forms of real estate. Owning a family farm or vacation home can present additional complications for you as well. One is taxes. Renting out a vacation home that you and your family also use can be a tax nightmare. And, unless you own a lot of geographically diverse property, you might be subject to the whims of local real estate markets. Finally, direct ownership of real estate is illiquid because you can't sell it as easily as other types of investments.
Despite these problems, real estate still should be in your portfolio. But you need to review your property carefully and not assume that owning one building or home takes care of the real estate portion of your portfolio. If you want to diversify your real estate more or invest in real estate for the first time, here are two easy ways to proceed. You can buy and sell individual REITs like stock, and the number of REITs to choose from has grown substantially in recent years. The challenge is that you must research REITs as thoroughly as you would a stock, and you must buy more than one or two to truly diversify your portfolio. A second - and much easier - method is to buy mutual funds that invest in REITs or real-estate-related companies such as construction or building supplies. Required initial investments are typically minimal, and you have the important advantages of professional management, diversification, and liquidity. |
