You have to be courageous to put much of your hard-earned retirement portfolio into the stock market, given that earnings are generally stalling and an interest rate hike cycle is just beginning. Moreover, with most bond funds only paying around a 3% annual return, and the majority of hedge funds performing poorly, it's getting more difficult for investors to find the 5% to 8% return they need to meet their retirement goals.
Until a few decades ago, there were few methods of investing in real estate aside from just buying properties yourself or in a partnership. That has changed. Investors can choose from dozens of different real estate-related investments. Investment opportunities in residential real estate, long a second sister to commercial real estate, have also grown, especially in the last few years.
A real estate investment trust (REIT) is a firm that owns and develops real estate assets. You buy shares in a publicly traded REIT similar to purchasing an equity. Various REITS specialize in different real estate sectors. Some REITs focus on commercial real estate, such as malls or office buildings; others focus on residential real estate such as apartments or condo developments.
While having a selection of REITs in your portfolio can complement stock and bond funds and mitigate portfolio risk/volatility, it's also important to understand how the real estate fund is designed and how value is derived from its holdings. Remember that the performance of REITs is based on cash flow and profits from selling properties, which is notably different than the factors that drive performance of stock and bond funds.
Although many investment advisors suggest considering real estate as an alternative investment, most suggest keeping it as a relatively small percentage of your portfolio. Mike Papierski, national real estate practice leader at Chicago-based Northern Trust Company, recommended in an article that investors cap real estate exposure in their portfolio at 15%.
Real Estate Investment Partnerships
Real estate investment partnerships can be structured in a variety of ways, including a tenant in common project, as a general partnership, or as a limited liability partnership (LLP) or a limited liability corporation (LLC). Each of these structures has pros and cons, so you should carefully consider your partners and potential liabilities before entering any partnership.