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Almost all financial advice suggests diversification to minimize risk if a certain portion of your portfolio takes a hit. Investing in real estate may be a good bet. By Kayla Knuf, MD

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Many residents and staff early on in their careers cannot afford to purchase a property (rental, commercial, etc.) outright. With increased interest rates, financing a property as an investment property is also not possible for many. Fortunately, there are a few other ways to add real estate to your portfolio separate from direct investment.

Real Estate Investment Trusts (REITs)

REITs are often compared to mutual funds. They are companies that own or finance income producing real estate. Most are traded on large stock exchanges, and they allow anyone to invest in portfolios of real estate in a similar way they would invest in another mutual fund or exchange traded fund (ETF). There are 3 types of REITS: equity, mortgage, and hybrid.

Some of the advantages are obvious. The maintenance is lower than owing and managing actual property. REITs allow stockholders to share the profit of real estate ventures while minimizing some of the risks associated with owning properties. On average, REITs pay out more dividends than stocks. The Internal Revenue Service (IRS) actually mandates that REITs must pay out 90% of their taxable income to shareholders as dividends. The simplicity of investing is another advantage for some REITs allowing potential investors to use any brokerage account to execute transactions. The liquidity of REITs are also advantageous to some who would not want their cash tied up in a physical property.

Real Estate Exchange Traded Fund (ETF) or Mutual Fund

Another way to add real estate into your portfolio in a diversified manner is through a real estate ETF or mutual fund. These are like REITs but instead they are comprised of shares of multiple REITs. This allows for real estate investment diversity. These too are often publicly traded and can be bought like any other mutual fund or ETF using a brokerage account.

Crowdfunding Options

Crowdfunding options exist for real estate allowing access to assets that are often income prohibitive for many. Crowdfunding sites seek to pair developers/real estate professionals with investors who want the ability to invest in real estate without owning or managing the properties. The concept is that these sites assist with raising capital for real estate investments. Usually, real estate crowdfunding deals have a sponsor who acquires/manages/sells investments and platforms who connect the sponsors to investors. Some benefits to real estate crowdfunding include higher risk adjusted returns, returns are less tied to the stock market (vs. REITs), and more precise investing (vs. REITs).

Crowdfunding options can be risky. Most investors lack the expertise (either in real estate in general or the local market) thus one puts faith in the crowdfunding platform to vet each deal. Each platform varies in investment minimums, fees, dividends, types of real estate invested in, and annual returns. On average, investment minimums are 1,000-25,000 thus these can be cost prohibitive for some. Fees can range anywhere from 0-1.5%. Different platforms advertise different returns on investments and range from 2-20%. Additionally, some of these platforms are accessible to accredited investors only which can limit access.

Diversification is advantageous in any portfolio. While real estate is often thought of as costly and cost prohibitive to many, there are ways to invest in real estate without directly owning property.

Resources/Additional Information:

https://www.investopedia.com/best-real-estate-crowdfunding-sites-5070790

https://www.investopedia.com/articles/investing/040315/reits-versus-real-estate-mutual-funds.asp

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Kayla Knuf, MD is a board certified anesthesiologist who practices in Texas.

The ASA Committee on Young Physicians is pleased to present this monthly article series on personal finance. These articles are not written by hedge fund managers or real estate tycoons but by practicing physicians. Some have business degrees and some do not – but every contributor is an anesthesiologist who has some guidance to offer the rising generation of attending physicians. It is not the intention of the committee to offer definitive financial advice, but rather some pearls of wisdom to consider while developing a personal fiscal plan. 

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#PersonalFinances