How well diversified is your retirement portfolio? If you're considering adding real estate to the mix, here are some things you should know.
Financial professionals may advise suitable clients to diversify their retirement portfolios by adding alternative investments such as real estate. Depending on your time, skills, resources, and preferences, you can include active or passive real estate investments in your retirement plans.
The active approach. If you are the entrepreneurial type, you might consider a “fix and flip” strategy of active investment. With this approach, you purchase a run-down house at a bargain price, fix it up, and then sell it for a profit. Because you are an active investor, your profits are taxed as ordinary income, not capital gains.
The passive advantage. For some people, passive real estate investing may be more feasible. You can participate in passive investing by purchasing and renting out a house. While you maintain ownership of your real estate, you can have professionals do the work of managing the property and collecting rents, while you collect a monthly income.
Property funds in your retirement account. You can purchase shares of a real estate investment trust (REIT) in your IRA and potentially your 401(k), if available in your plan. REITs allow individual investors to buy shares in commercial real estate portfolios. The managers of the portfolios are responsible for leasing the space and collecting rent, then distributing the income as dividends to shareholders. This can help diversification, and you don't have to purchase or manage any properties yourself.
Determine which REIT is suitable for you. It is important to differentiate between the types of REITs available to you. An equity REIT owns and operates income producing real estate, a mortgage REIT provides mortgages on real property, and a hybrid REIT will do both. You will also need to consider the liquidity. Non-traded REITs are privately held and are generally illiquid. Publicly traded REIT shares can be easier to sell than real property, giving this investment higher liquidity.
Consider real estate as part of your overall financial plan. Real estate offers risks and returns that can significantly differ from those of conventional investments. Call or email me today, and we can discuss the most appropriate way to incorporate suitable real estate investments in your financial plan where applicable.
LPL Financial Advisors do not provide services related the buying and selling of physical real estate properties.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
Investing in Real Estate Investment Trusts (REITs) involves special risks such as potential illiquidity and may not be suitable for all investors. There is no assurance that the investment objectives of this program will be attained.
Investors should consider the investment objectives, risks, charges and expenses of real estate investment trusts (REITs) carefully before investing. The prospectus contains this and other information. You can obtain a prospectus from your financial representative. Read carefully before investing.