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Published Oct 08, 21
4 min read

I Owned Six Homes And Lost It All With Real Estate Investing in Hughson, California

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In theory, it is a safe way to get into real estate investment, but groups may charge the kind of high fees that haunt the mutual fund industry. As with all investments, research is key. Real Estate Limited Partnerships A real estate limited partnership (RELP) is similar to a real estate investment group.

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However, RELPs exist for a finite number of years. An experienced property manager or real estate development firm serves as the general partner. Outside investors are then sought to provide financing for the real estate project, in exchange for a share of ownership as limited partners. The partners may receive periodic distributions from income generated by the RELP’s properties, but the real payoff comes when the properties are sold—with luck, at a sizable profit—and the RELP dissolves down the road.

They provide the ability to gain diversified exposure to real estate with a relatively small amount of capital. Depending on their strategy and diversification goals, they provide investors with much broader asset selection than can be achieved through buying individual REITs. Like REITs, these funds are pretty liquid. Another significant advantage to retail investors is the analytical and research information provided by the fund.

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More speculative investors can invest in a family of real estate mutual funds, tactically overweighting certain property types or regions to maximize return. Why Invest in Real Estate? Real estate can enhance the risk-and-return profile of an investor’s portfolio, offering competitive risk-adjusted returns. In general, the real estate market is one of low volatility, especially compared to equities and bonds.

This asset class typically trades at a yield premium to U.S. Treasuries and is especially attractive in an environment where Treasury rates are low. Diversification and Protection Another benefit of investing in real estate is its diversification potential. 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.

The more direct the real estate investment, the better the hedge: Less direct, publicly traded vehicles, such as REITs, are going to reflect the overall stock market’s performance. Some analysts think that REITs and the stock market will become more correlated, now that REIT stocks are represented on the S&P 500.

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Even the more indirect forms of investment carry some protection. REITs, for example, mandate that a minimum percentage of profits (90%) be paid out as dividends. Inflation Hedging The inflation-hedging capability of real estate stems from the positive relationship between gross domestic product (GDP) growth and demand for real estate.

Therefore, real estate tends to maintain the purchasing power of capital, bypassing some of the inflationary pressure onto tenants and by incorporating some of the inflationary pressure, in the form of capital appreciation. The Power of Leverage With the exception of REITs, investing in real estate gives an investor one tool that is not available to stock market investors: leverage.

And even then, the percentage you can borrow is still much less than with real estate, thanks to that magical financing method, the mortgage. Most conventional mortgages require a 20% down payment. However, depending on where you live, you might find a mortgage that requires as little as 5%. This means that you can control the whole property and the equity it holds by only paying a fraction of the total value.

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This is what emboldens real estate flippers and landlords alike. They can take out a second mortgage on their homes and put down payments on two or three other properties. Whether they rent these out so that tenants pay the mortgage, or they wait for an opportunity to sell for a profit, they control these assets, despite having only paid for a small part of the total value.

Still, one drawback of investing in real estate is illiquidity: the relative difficulty in converting an asset into cash and cash into an asset. Unlike a stock or bond transaction, which can be completed in seconds, a real estate transaction can take months to close. Even with the help of a broker, simply finding the right counterparty can be a few weeks of work.

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But they come at the price of higher volatility and lower diversification benefits, as they have a much higher correlation to the overall stock market than direct real estate investments. As with any investment, keep your expectations realistic, and be sure to do your homework and research before making any decisions.