This piece will examine many of the common pitfalls that investors in physical properties deal with, and take a closer look at the alternative offered by real estate investment trusts (REITs) and real estate limited partnerships (LPs).
What investors get wrong: Valuation and aggravation The first and most obvious evaluation of whether a real estate investment will be successful involves the economic relationship between the purchase price of a property and its capacity as a cash generator.
Hassles in negotiating with tenants and the time commitment and cost involved with property management should also be primary considerations.
Real estate securities as a viable alternative Real estate can be — and historically has been — an asset class capable of delivering more than satisfactory returns.
Enter the real estate security, which can be simplified into two basic forms: (1) real estate investment trusts and (2) real estate limited partnerships.
Publicly traded REITs are listed on the public markets and are freely accessible to any investor interested in gaining exposure to the sector.
Real estate limited partnerships, or “RELPs,” also provide investors with passive exposure to the commercial real estate sector.
Limited partnerships, because of their pass-through tax status, are also incentivized to distribute most, if not all of, their earnings to investors.
These vehicles are true proxies for real estate, with real properties, real rents and real appreciation to boot.
Investors should consult their financial adviser on the strategy best for them.