A survey released by the wealth-management unit of Morgan Stanley in February showed that millionaires in the US considered real estate to be the top alternative-asset investment for 2014. One-third of the millionaire respondents planned direct purchases of residential and/or commercial real estate in 2014, and 23% plan to invest in REITs (Real Estate Investment Trusts).
Why is real estate a preferred choice by the already wealthy? The survey does not ask, but here are some likely reasons:
- Good Trends – Commercial real estate has been on a recent growth run, according to data from the Green Street Commercial Property Price Index. Year-to-date values have grown 4%, and the index is now 9% above the 2007 peak prior to the housing crash. The residential housing market has also rebounded since the 2011 low point.
- Stock Market Concerns –With the stock market continually breaking all-time highs, some wealthy investors are expecting the growth rate cannot be sustained. Thus, a higher percentage of portfolios may be shifting toward real estate based on expected higher comparative growth over the near and mid-term.
- Interest Rates –In historical terms, interest rates are still quite low, and every indication from the Fed and the economy at large suggests that they will stay that way for some time. These low rates make real estate an attractive option if you have the money to invest.
- Value of High End Properties – Foreign investment in high-end real estate has kept prices and values relatively high. It highlights the relative safety of high-end real estate (and for foreign investors, the value of dollar-based investments).
- Income Predictability – Whether through rental revenue or dividends, a wisely chosen real-estate investment can provide steady and predictable income.
- Potential Tax Advantages – Investment property owners can deduct a host of expenses, while getting the tax benefit of depreciation. These expenses include mortgage interest, repairs, local travel and long distance travel to name just a few.
- Long Term Performance – If you can invest in real estate for the long term, you are typically rewarded well -- and who can better afford to sit on an investment than someone who is rich? Consider that a J.P. Morgan report comparing 20-year annualized returns on specific types of long-term investment found REITs superior at a return of 11.2%. This easily outperformed gold at 8.4%, the S&P 500 at 8.2%, and bonds at 6.3%.
Note: Simple home ownership returned a dismal 2.7% – investing in real estate does not mean buying your own home and holding it for its equity value. While the equity is excellent to have, the appreciation in your home price will probably not be much above inflation for the same period. However, many people still think that is the best investment they can make.
As an individual investor with limited resources, can you get in on real estate investing? You probably cannot buy or build a skyscraper and put your name on it in big letters as some infamous real estate tycoons with memorable hairstyles have been known to do, but you may be able to afford a rental property or two. If not, your best bet is to invest in REITs; mutual funds that invest solely in real estate.
It is important to determine your investing goals first before diving into REITs. What do you want to accomplish? REITs have different types of real estate holdings and different formats, and it is important to match them to your needs. They may generate income through direct ownership of real estate and rent collection (equity REITs), they may hold the mortgage debts on property and generate income through interest (mortgage REITs), or combine both (hybrid REITs).
REITs are an excellent mechanism for investors who cannot afford rental properties to enter real estate investments and still maintain relative liquidity. Invest wisely, and perhaps someday Morgan Stanley will be surveying you for your alternative-asset investment advice.