Like most investors, your investment journey may have begun with a 401K or employer retirement plan. Each pay period, contributions purchased mutual funds and grew to substantial balances over the years. Now you want to consider other investment strategies that will strengthen your financial security.
Traditional stock market investments, primarily through mutual funds or ETFs, produce solid returns over time. They also have risks, including market volatility you want to mitigate. If you are interested in diversifying your portfolio to include real estate, understanding the differences between real estate and traditional stock market investing can help you decide how and how much you want to invest.
Stock Market Investing
Stock market investing is a popular way to set aside money for retirement and college goals. Tax-advantaged accounts and automated investing strategies provide ease and flexibility. You do not need large sums to participate, can adjust contributions at any time, and monitor the balance from any electronic device.
Owning stock buys a minuscule piece of a large corporation. Profitable companies build wealth through stock price appreciation and, in some cases, quarterly dividends. You could pay lower capital gains taxes when you sell a position outside of a tax-advantaged account. However, withdrawals from 401ks are generally taxed as ordinary income.
Volatility is also a downside to market investments. Internal events such as a change in CEO, issues with a product or service, or other company announcements directly affect the value of your holdings. Instability can also come from outside incidents that have little to do with how a company operates. Events like a natural disaster, unrest in a foreign country, or intangible things like consumer sentiment can all impact the value of your investments, creating unpredictable volatility.
Real Estate Investing
Pairing real estate with stock market investments expands diversification and reduces volatility.
Investing in real estate is different than purchasing a home to live in because investors use different criteria. You must identify properties with a high propensity to appreciate while considering market conditions and long-term costs such as management, debt servicing, and capital improvements. A good real estate investment is less volatile than stocks but can produce comparable returns.
You achieve profits through appreciation and dividends (via a share of collected rents). However, in many cases, the general partner can boost profitability through actions taken during ownership. Buying multifamily real estate that needs capital improvements in a growing regional market is one way to increase profitability. Upgrading units results in higher rents, increasing dividend payments. Improvements also create faster appreciation and a higher sales price at the exit.
Despite the benefits and low risk of investing in commercial real estate, many investors hesitate because of the high cost of entry, the expertise required, and the time needed to identify, purchase, manage, and eventually sell a property.
Commercial real estate syndications can overcome these drawbacks. Syndication allows you to partner with a sponsor, reducing entry costs and giving you access to multi-million-dollar deals. The sponsor has the expertise and completes all the legwork for the project, including identifying an appropriate property and buying, managing, and selling the investment.
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Final Thoughts
If you are interested in commercial real estate investments, you can learn more about the syndication process here.
Disclaimer:
This article does not offer legal or accounting advice and is only meant for informational purposes. For specific tax questions seek the advice of an industry professional.
