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Investing in Income-Producing Real Estate

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Investing in Income-Producing Real Estate

As an investment, real estate is more of a constant that almost any other product or service. Real estate rarely disappears, and while its purpose can sometimes be changed (from one type of development to another, predominantly), its worth is never questioned.

As an investment for advisors to suggest to investors, real estate is arguably valuable. There is no profit to advisors who lean clients toward real estate investing, although a successful move in that direction can cause clients to appreciate their advisor for making the suggestion.

Outside of home ownership, real estate investing is more likely the purview of wealthier clients, and advisors should provide some focus and clarity on real estate investing for those investors with a sizable level of investable assets. Real estate can be presented as a product that has staying power, significant potential for profit, and a long standing in the world of investment.

There is also an indication from Spectrem research that younger investors have a greater interest in real estate investing, perhaps due to a higher risk tolerance and a long-term view of the investment value. Millennials are far more interested in real estate investment outside of home ownership than are your older clients.

Real Estate Assets

Most investors begin their lives in real estate investing when they purchase a home. But, buying a home is not the same as investing in real estate. Investment real estate is designed to bring a profit, whether because the real estate creates income from leases through commercial properties like warehouses, or the real estate creates income through rentals, such as apartment buildings. And, again, real estate investments can provide profit simply by existing; over time, property values rise concurrent to inflationary economic behaviors.

REITs, meanwhile, are a way for investors to get involved in real estate investing at a lower level of risk. Senior Corporate Executives and investors from the field of Information Technology show a higher level of interest in REITs.

Investing in real estate is not for everyone. According to Spectrem’s ongoing research, over the past 12 months, real estate makes up approximately 5 percent of all total assets among investors with a net worth above $100,000 (not including the value of their primary residence). But there are examples of real estate investing which can provide both short-term and long-term profit, and, because of its sustainability as a product of value, can be a safe place to invest for those clients who are looking for a consistent income stream which also appreciates over time, provides tax advantages in some locations, and diversifies a portfolio.

As of Oct. 1, 2019, here is a rundown of the specifics of real estate investing among all investors:

Commercial rental property – Property zoned for business, including office buildings and retail locations, have obvious income-generation potential. Among all investors, 6 percent own commercial rental property, but the wealthier the investor, the more likely they are to be invested in commercial real estate. Likewise, younger investors are much more likely to invest in commercial real estate. Sixteen percent of Millennials invest in commercial real estate, although their mean value of those investments is low compared to that of older investors. Millennials who invest in commercial real estate are likely to increase their level of investment over time.

Residential rental property – Some of your clients may not mind being landlords. Thirteen percent of all investors are invested in residential rental property, although many are perhaps invested as part of an ownership group. Twenty-three percent of Millennials are invested in residential real estate, as are 16 percent of investors with a net worth between $5 million and $10 million.

Undeveloped land – Loosely defined as land with no structures built or groundwork done upon it, the ownership of undeveloped land is a future-use investment. Twelve percent of investors own undeveloped land as an investment, but that jumps to 20 percent of Millennials.

REITs – Spectrem research shows that 13 percent of all investors (and 19 percent of those with a net worth above $5 million), invest in Real Estate Investment Trusts, which offer investors a chance to place funds into an account which holds multiple properties at once. Unlike the other types of real estate investments, REITs do not require the investor to manage the property themselves. Unlike the other types of real estate investments, there are fees and other costs assessed that can reduce the profitability; so that the reduced financial exposure can thus provide a lower level of return on investment.

Related: Millionaires Jump Back In, Non-Millionaires Step Back

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