The question is – what is right and best to create income – especially at or near retirement? Also, is there another way to participate in the virtues of real estate while generating income and hopefully long-term upside?

Understanding the risk

With any kind of investment that’s going to generate significant income and hopefully significant long-term returns, you need to understand the risk. One of the biggest downsides of owning a commercial building or piece of residential real estate remains the risk given the number of tenants you’re collecting income from relative to the number of properties you own. I have been in the wealth management business for more than 20 years and nothing can destroy a great financial plan like a major interruption in income at the wrong time. Typically, when it’s hard to find a tenant, it would not be surprising if the economy was struggling as well. Just when the income is needed, it’s not there and other parts of the portfolio may also be struggling. All of this means we need to treat real estate income, especially when there’s not large tenant diversity, carefully when making retirement projections.

The same is true if you own commercial property. If you lose a tenant, rarely does a client own enough commercial property to lose a tenant and not get significantly impacted by that loss of income.

The more properties, the more tenants you can rely on for consistent income – the better on all counts. However, owning several individual properties isn’t always feasible for everyone. To help with this, we recommend institutional selection of the real estate whenever possible.

Here’s my question – as good as real estate can be long-term, has the market unwrapped another way to invest in this asset class right now at a bargain? Let’s unpack and explore.

Publicly traded real estate

Investing in real estate is a potential compliment to most investment portfolios as this asset class offers an ability to balance the risk of a traditional stock portfolio. Right now, something that’s interesting to look at is the publicly traded real estate investments. If you’re looking to generate income by investing in real estate, the potential cost of getting into this asset class is relatively lower due to its sharp move downward in the first quarter of 2018. In addition to the valuation, there’s a few other things that we think are potentially positive for the sector:

1. Many believe that the real estate sector will do very well in 2018 thanks to President Trump and the Federal Reserve. The new tax law classifies the REIT (real estate investment trust) as a pass-through investment.
2. The dividend yield for holding REIT stocks is now better than it has been in some time. By no means are we suggesting you race out and buy the real estate index. Yet, the yield on this investment is 4.42% as of this writing at the beginning of the second quarter of 2018.

Find the right fit

In conclusion, we think investing in real estate makes sense for most portfolios. Some may do it by owning and renting out a real building or residential property. Others may look at the opportunity to invest in the publicly traded real estate market, especially given some of the good news from Capitol Hill as well as some favorable dividend income that looks better given the recent price movement. We think investing in publicly traded REITs right now is something that appears interesting, but it doesn’t mean that it couldn’t fall further despite some positives that may hold it up for the remainder of the year.

Before investing, we encourage you to reach out to your investment professional to see if it’s suitable to you. We are happy to provide insight by reviewing your current physical real estate holdings.

Are you looking for an Arizona wealth management firm to provide personalized investment management? If so, contact the wealth advisors at Henry+Horne Wealth Management.

Michael Carlin, AIF®