Real estate investments require large amounts of capital and therefore it is advisable to start investing early, when one is free of family burdens.

By Abhinav Sharma, AVP- Finance of Realistic Brokers

Millennials are seen as people who live today without worrying about the future. However, this is hardly true. Millennials live in the present; but at the same time they also plan for the future. Most of them are already making some sort of investment for their retirement. The stock market, mutual funds, and retirement plans are some of the ways people invest to secure their future after retirement.

However, due to the volatility and complexity of the stock markets, many investors do not want to invest in them or look for opportunities to diversify their investments. Investing in real estate, with conventional and new methods, has emerged as a viable option for a retirement investment portfolio in mind.

Traditionally, the first real estate investment for most people is buying a home to live in. After owning a home, investing in a home with rental income at the center is the next big step. The property takes precedence over the majority, even in the case of investing for rental income.

However, a small percentage of investors also invest in commercial real estate for the same purpose. Real estate investments require large amounts of capital and therefore it is advisable to start investing early, when one is free of family burdens. The goal should be to have the property free for 5 to 10 years before retirement.

One careful analysis must be made of the expected rental income and costs such as maintenance, property tax, etc. must be taken into account. It goes without saying that the investment is only viable if the expected income is significantly higher than the expenditure. An investor who invests directly in real estate should be aware that real estate is quite difficult to liquidate in the short term.

When investing in real estate with retirement in mind, the investors must remain flexible with regard to location. Investing in emerging locations can offer competitive rates and schemes from the developers. However, things like connectivity, nearby developments, builder’s reputation and government plans for the location are some of the important points to consider before investing one’s hard-earned money.

When talking about investing in real estate, direct investing in real estate is the first thought. However, direct investing in real estate is not the only option available to investors. Real estate investment trusts (REITs) are a tool for investing in real estate without buying a property. REITs are companies that invest in, own and operate real estate. The investors receive dividends from the profits made by the company. Given its global experience, REITs have historically been one of the best performing assets.

REITs can help investors diversify their portfolios. They minimize the risks and offer a higher return. REITs typically target specific subsectors of the real estate industry. Five types of REITs are generally available to investors; Retail REIT, Residential REIT, Hospitality REIT, Mortgage REIT, and Office REIT. Depending on market conditions and personal preference, the investor can choose one of the above instruments. An experienced real estate advisor can help choose the best REITs available in the market.

In addition to lower risks and higher returns, REITs also offer flexibility regarding the lock-in period. The investors can liquidate their assets in the short term. However, since we are talking about the pension portfolio, it is advisable to stick to the investments for a longer term. Before jumping on REITs, investors should be aware that REITs’ dividends are taxed as normal income.

Real estate investments have traditionally given investors a sense of security by owning something real and tangible. However, it is rapidly emerging as an option to diversify investments, create new revenue streams and secure the future.

However, like any other investment, real estate is not completely risk-free either, although the risk factor is significantly lower than most other options. To get the most out of the real estate boom, the investors should select the investment tool carefully and be ready to stick with their investments for a long time.

This post Real estate for a pension portfolio: yes or no?

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