Is the Time Right for Investing in Real Estate?

Presented by CFG Wealth Management

The above headline is a loaded question—it implies that market “timing” should play a critical role in making real estate investing decisions, in the same way that technical analysts attempt to time the buying and selling of stocks.In reality, while all investment performance is tied in varying degrees to timing, investors may want to consider different metrics to gauge when transacting in real estate. Direct real estate investments are inherently distinct from stocks or exchange-traded funds in ways that reduce the relative importance of timing buy and sell decisions.By recognizing some of these fundamental differences in real estate from other parts of their portfolios—including longer hold periods—educated real estate investors learn to shift their focus from “when” to “how and where”.

A Different Time Horizon

Real estate investing is a long-term proposition. No direct real estate investment (a single building, a partnership interest or a REIT share) can be sold at a moment's notice. Therefore we refer to these assets as “illiquid”—a label that causes concern for some investors.Yet liquidity comes at a price, which is reflected in the rates we receive from banks and the costs of trading on an exchange. We accept these costs because we value accessibility and trading securities in real time.On the other hand, smart real estate investing emphasizes other potential benefits: steady income, stability, gradual capital appreciation… all of which run contrary to the “make a quick a buck” mentality. If you are holding a real estate investment for, say, seven years, it probably does not matter significantly whether you invested last month or will invest next week.

Prime Objective: Income

Receiving steady income is a core objective underlying most real estate investments, and this is another factor that makes market timing less relevant.If your primary purpose for investing in a real estate fund, for example, is to receive a monthly dividend, then the subsequent changes in that fund's share price should be of little concern until the fund approaches its liquidation phase. In all likelihood, the exact date you invested in the fund will not materially impact your total return, which is a combination of your dividends received and your capital appreciation upon liquidation.

The Right Investment Vehicle Matters

With a clearer understanding of the unique role that real estate plays in your overall portfolio, you can stop worrying so much about timing and focus on quality. You should ask these questions before investing in direct (non-exchange traded) real estate: 1) Am I investing in the right sectors of the real estate market (e.g., apartments, core commercial, debt)?2) If investing in a fund or REIT, what is the sponsor's track record? 3) How much of my investment will actually go into the real estate portfolio? 4) What is the offering's investment strategy? 5) What is the exit plan for the portfolio (i.e., liquidation of the assets or IPO)?

Regardless of whether another “shoe will drop” in commercial real estate, there may be suitable real estate opportunities for you today.

The information presented above reflects opinions that are subject to change at anytime based on market or other conditions. These views should not be relied on as investment advice.Investing in real estate and real estate investment trusts (REITs) may not be suitable for all investors and involves significant risks. These risks include, but are not limited to, limited liquidity, limited transferability and real estate fluctuation based on a number of factors, which may include changes in interest rates, laws, operating expenses, insurance costs and tenant turnover.  Source:  KBS