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Investing in Real Estate: 5 critical questions

15 Minute Read

A common decision many investors face is whether or not to add real estate to their overall investment strategy. As you evaluate whether or not investment property is right for you, consider these fundamental questions:

1. Does investing in real estate make sense for your investment portfolio?

There’s a certain allure to owning real estate. After all, who hasn’t read about individuals—or had friends, relatives, or business colleagues—who have made a “killing” in real estate and illustrated that real estate investing can be a successful wealth-building strategy?

But here’s the question you and your advisors need to answer: Is owning investment property the right investment strategy for you? There are many factors to consider.

How does investment property impact your overall portfolio?

Investing in real estate can potentially help round out your investment portfolio and provide a variety of benefits, including:

  • Diversification beyond traditional marketable securities
  • Income generation and cash flow stability
  • Asset value appreciation
  • Tax benefits by taking advantage of depreciation
  • A hedge against inflation
  • Generally higher potential returns than bonds

Does direct ownership address your investment goals?

Real estate investments should be viewed as another component in your overall investment strategy. Just as you do with other investments, you need to consider your risk/return profile and how much real estate—if any—it makes sense for you to own. It’s also notable that different types of real estate investing have unique risk and return characteristics.

What are some advantages of direct ownership compared to more liquid real estate investing?

Direct ownership can provide a number of advantages over maintaining fractional ownership in marketable securities that have real estate as the underlying asset, such as a real estate investment trust (REIT).

With direct ownership, an investor has much greater control over decisions that could impact the returns generated by an investment property. For example, a direct real estate investor can select the property based on location or type, and make decisions regarding maintenance, debt, capital improvements, and leasing.

Do you fully understand the potential challenges of owning investment property?

Before purchasing investment property, consider the following:

  • Direct ownership involves a much greater commitment of time and resources than investing in liquid real estate vehicles like REITs, particularly when you are investing in properties outside your local market.
  • When you own investment property, there are a number of costs to consider, including maintenance and repairs, so understanding the full cost of your real estate investment is critical.
  • Real estate ownership and management is a time commitment. Depending on how busy your life is, you may not have time to roll up your sleeves and handle all the duties of property ownership.
  • Real estate is a specialized area of investing that requires a certain level of experience and expertise to achieve success. If you don’t have this experience, you run the risk of making a costly error that can impact your investment.
  • Real estate ownership doesn’t provide the same liquidity as other types of investments such as stocks and bonds. Before you invest in real estate, ensure that you can afford to have a significant portion of your money tied up in property, where it can’t be quickly accessed for other purposes.

The great news is that for many of these concerns, an advisor can help you navigate the process, and even manage the property on your behalf, to help you avoid many common pitfalls. See more on leveraging the guidance of a team in section 4.

2. What types of real estate investments should I consider?

If you decide to invest in real estate, one of the first big questions will be: What kind? The options range from single- and multi-family residential properties to office, industrial, and retail commercial properties.

Some factors to consider when choosing the type of real estate to buy include:

  • What do you know? If you will be taking on a more hands-on approach in managing the investment, choose a property type with which you are comfortable or somewhat familiar. For instance, if your parents owned a four-unit apartment building, and you learned a lot about managing that type of property from kitchen table discussions or by working on the property, maybe a similar property is a good starting point.
  • How much money do you have to invest in real estate? To remain properly diversified and adequately liquid, you probably don’t want to have most of your money tied up in real estate. For that reason, it would generally make more sense for someone with $25 million in assets to consider purchasing a $4 million, three-tenant retail building than it would to be for them to eye an $18 million industrial space.

3. How do I select a specific property?

Once you’ve decided on the type of real estate you want to invest in, and the general geographic location you prefer, you and your advisors will need to consider a range of factors to zero in on a particular property. Generally, your due diligence should include:

  • A professional inspection of the property to ensure you have accurate information about its physical condition. You want to avoid any major surprises, such as an immediate need to invest $100,000 in a new roof or being saddled with the costs for a required environmental cleanup, or make other unexpected capital investments related to things like plumbing or electricity.
  • A property appraisal. Particularly if you are new to real estate, have a local appraiser evaluate the property and the surrounding area and advise on the property’s value.
  • An evaluation of the location. For example, if it’s a retail location, are the streets and traffic patterns favorable for promoting business? Are the intersections easy to navigate? And if it’s an industrial property, how close is it to the freeway?
  • An assessment of past financial performance and future prospects. An evaluation of income property should include a review of the tenant base, current vacancy levels, and market conditions. The big question you need to answer here is: Will this property satisfy my investment objectives?
  • A review of existing leases and other legal issues related to the property.

4. What professional help will I need?

When investing in real estate, you may need expert help both to evaluate the purchase from an investment perspective—i.e., determine if it meets your investment goals and fits your risk/return profile—and to manage the property. You could work separately with a financial advisor on the former and a property manager on the latter. Or you could consolidate by using a financial institution for both.

When you buy investment property, you are responsible for day-to-day property management—everything from maintenance to tenant relations. However, if that’s not how you want to spend your time, you can outsource these duties to a property management firm or work with a bank asset manager who can either manage the property directly or oversee a property manager for you.

Depending on the degree of involvement you want to have in managing your real estate investment, a bank can provide either trust account or agency account services. With a trust account, the bank acts as the corporate fiduciary trustee; that means your wealth advisory team and asset manager have decision making authority and essentially act as the owner on your behalf, making decisions based on policies and procedures you approve. Owners who want to participate more actively in decision making can use agency account services where a bank agent provides guidance and recommendations, and the owner weighs in on all decisions.

5. How should I fund my real estate investments?

Many experienced real estate investors look to leverage their purchases to the greatest extent possible, but that may not be the best strategy for a beginner.

Circumstances also may dictate your strategy. For instance, in some markets for certain types of real estate assets, you might not be able to win a deal unless you are able to pay in cash and do so very quickly. On the other hand, there may be situations where to win a deal you might have to pay a premium price, and that might require you to take out a loan.

If you are considering financing a real estate purchase, your advisor can help you evaluate different loan options and how the cost of debt will impact your likely return on investment from the deal.

To learn more about the opportunities and challenges associated with investing in real estate, ask your Union Bank Wealth Management relationship manager to introduce you to one of our Specialty Asset Management Services Group real estate professionals.


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This is a publication of The Private Bank at MUFG Union Bank, N.A. (the Bank). This publication is for general information only and is not intended to provide specific advice to any individual. Some information provided herein was obtained from third-party sources deemed to be reliable. The Bank makes no representations or warranties with respect to the timeliness, accuracy, or completeness of this publication and bears no liability for any loss arising from its use.

Investment management services offered by MUFG Union Bank, N.A. in conjunction with its subsidiary, HighMark Capital Management, an SEC-registered investment adviser. Investments employing managed strategies: • Are NOT deposits or other obligations of, or guaranteed by, the Bank or any Bank affiliate • Are NOT insured by the FDIC or by any other federal government agency • Are subject to investment risks, including possible loss of the principal amount invested.

Wealth planning strategies have legal, tax, accounting and other implications. Prior to implementing any wealth planning strategy, clients should consult their legal, tax, accounting and other advisers.

Alternative asset classes may help improve a portfolio’s risk/return profile. They are also subject to a higher degree of risk and can involve significant loss.