Investment in Real Estate

di Walter Snyder, Swiss Financial Consulting

This newsletter has often suggested that investment in real estate is one way of diversifying a portfolio. One can have liquidity and real estate thanks to real estate investment trusts, REITs, or real estate companies that are traded on the market. These companies invest in real estate and also pay dividends. Such investments are suitable for pension funds and investors who want to be able to shift quickly between different asset classes. Like all market traded paper, one is exposed to the downside risk should the market undergo a sharp decline.

There are other real estate companies that are not traded on the market and therefore cannot offer much in the way of liquidity but which do give good returns on investment (ROI). Bonacasa is an example of a good Swiss company of this sort. The company is very well managed and provides good returns in the form of dividends.

Direct investment in real estate can produce very interesting ROI but does not offer much as far as liquidity is concerned as the sale of real estate is a lengthy time-consuming process and carries with it not only expenses but also taxation, sometimes extremely heavy taxation. Even so, there are many investors who have outright ownership of real estate as an integral part of their portfolio. Rental producing properties can be either commercial or residential or a combination of both. It is important to keep this distinction in mind as the differences are substantial. There are also other points to be considered when planning direct investment in real estate. Location is a key component of the value of a property as is its condition and whether or not it is rented out. Empty buildings or apartments do not bring in any income.

This is why empty spaces can be bought at a lower price. A fully rented apartment building is usually a good investment since it is possible to find new tenants when a few move out while the remaining tenants continue paying rent.

If the main tenants of commercial properties decide to move elsewhere, the value of the property may fall. That is why long-term contracts are desirable for commercial properties. The quality of the tenant is also important.

Investors planning on investing directly in real estate should be careful when doing so and draw on the advice of people with experience in that field. One great advantage of properties is that they usually gain in value in inflationary environments. The fact is that real estate prices continue to climb even when statistics offices claim that inflation is very low. Check the increase of London and Sydney real estate prices against official inflation rates.

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