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Real estate investors enrich their portfolios in two ways

Here’s how you can invest in real estate in a smart and correct way according to a wealth manager.

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In Forbes Magazine, wealth manager Rob Russell answers some investors’ questions about the smart, correct way of placing their stakes in real estate.

He starts off by acknowledging that these investors are naturally curious about this field they know very little about. At the same time, he also admits that many of them are instinctively skittish about making the plunge. The previous economic crises, triggered by property-related disasters like the housing bubble collapse in the mid-2000’s, is one reason.

He allays these fears by referring to a Tiger 21 2015 report saying that 25 percent of the portfolio owned by high-value investors actually have been set aside for real estate and property development. These experienced fund managers do realize the advantages for doing so:  strong return on investments, higher-than-usual dividends, and an increase in diversification in the industries they align with.

With all these information as incentives, Russell urges newbies to try one of the two approaches should they want to try their investing hand in real estate. The first is the purist and simplistic way of leasing. Buy or build, then develop a property. After it has been checked and made ready, rent it out and collect the payment. Owners who lease their condominiums, office space and former homes belong to this group.

The second approach is studying these property owners who do follow this practice, and buy shares in their companies. This more macro approach may not directly connect the investor with the consumer, who is the tenant. However, it does put him in touch with industry power plays and extend his hold on the entire sector.

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Pros and cons

The purist way is called the passive approach because the investor-owner simply waits to collect his rent on their due dates. The accumulated collection of monies becomes his revenue and, in a sense, the return on his investments. Newbie investors often prefer this option because it seems to carry less risk.

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Buyers can take one of two approaches when investing in real estate. (Source)

On the other hand, to make their investments work, they must realize that they must take a hands-on approach. They cannot simply pop up during collection time. They must have a thorough grasp of the industry, such as legal requirements, safety zones, building specifications, contracts, and customer relationships with tenants. Management is a prerequisite to success. In a sense, newbie investors will be acting more as businessmen if they invest in real estate this way.

The second approach would have newbie investors placing their monies in Real Estatement Investment Trends (REIT) which are publicly traded. Compared to the purist method, it requires less time and money. As it is more liquid, funds become more available. Accessing REIT is simply buying shares as you would from any other publicly listed company in the stock market. Their dividends and returns also promise to be higher than the norm.

However, its connection with the overall stock market makes REIT appear to be of high risk to first-timers. They are also more vulnerable to industry changes, stock market fluctuation, and changes in interest rates.

Russell ends his column by advising wary real estate investment newbies to try both the purist and REIT approaches, with limited funding at lesser risks in each.

Michael Jermaine Cards has made a second home in Singapore for the past 15 years. As a business executive and a financial journalist, he has seen first hand the spectacular rise of Asia’s most prosperous country, especially in the IT sector. Today he still gets a front seat at the latest market developments, stock movements, and IT innovations. He keeps close to the Western fintech sphere through his contacts in his native New York. A family man with one son, he does business consulting in parallel to his writing.

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