I am often asked the question, “Is real estate a wise investment?”

My answer to this question is yes, I believe in investing in real estate as an asset class for the long term.

But no, I am not a fan of investing in individual real estate properties as an investment.

I want to clarify; I am talking about buying real estate as an investment outside of or in addition to your home residence.

I know there are many people who may disagree with the opinions expressed here. Yes, there are exceptions to the general rule and if you know what you are doing, are an expert at speculative real estate and fixing up homes and comfortable with the inherent risk of owning property you can be successful at using real estate to increase your wealth. But I would say these people and situations are now the exception.

I always find it interesting that you hear so many stories about people that made tons of money in rental real estate, but rarely about the frequent disasters as people don’t talk about those as much. Just like you always hear about the amount of a gambler’s winnings but rarely the full amount of their losses.

One of the most important aspects of owning an individual investment property is understanding the numbers and viewing it as a business. If you are not sure what the Net Operating Income (NOI) is for the property you are considering, you should NOT buy it.

Here are the primary reasons why I do not recommend directly investing in real estate properties:

1) Real estate is one of the few investments that can cost you significant money and time.
Owning property as an investment can include such costs as: interest on the loan, closing costs, cost of finding renters, cost for months without tenants, cost of additional insurance, cost of repairs and upkeep on an investment property just to name a few. Many people do not consider all the costs of owning a real estate property.

2)Real estate is a leveraged investment which increases the risk.
Most people take out a loan to buy the investment whether it is a house, apartment building, or land. They are leveraging their initial investment and betting that the investment will be worth more. Leverage magnifies both gains and losses. (This is great on the upside, bad on the downside.) If the real estate market has dropped in value, you may not be able to sell the property for what you put in and you still have a cash outflow requirement every month.

3) A Real Estate property is not a diversified investment.
Most real estate is an investment in one property in one specific location. You are generally putting many of your eggs in this one basket which once again increases the risk. (Diversification is one of the most important tenants of investing. We at MSFS are fans of low cost mutual funds and ETFs due to the inherent diversification of this type of security.)

4) Real Estate is a highly illiquid and non-marketable asset.
Depending on the real estate market it can take a long time to sell a home. Even during good markets, it usually takes more than a month to sell and close on a real estate property. Anyone who has owned a home during a buyer’s market can tell you their nightmare and frustration of having the house on the market for over a year (or years).

How about vacation homes?
Even with regards to vacation homes, if you want a vacation home to enjoy as your vacation home, do it, if that makes financial sense for you. I view that differently than just buying a second house purely as an investment. The enjoyment and pleasure you get by having a vacation home makes up for the risks and costs of the real estate. The main objective of a vacation home is to be used and enjoyed is different than a property bought primarily as an investment. (Often times it is much cheaper and more convenient to rent a vacation house for several weeks a year than to have the costs of owning a vacation home.)

REITs
If you believe in and want to invest in real estate, I AM a proponent for Real Estate Investment Trusts or REITs. REITs are a security that trades like a stock and invests directly in real estate by owning a portfolio of properties and/or mortgages. REITs allow you to own real estate as an investment in this asset class with the advantages of:
1) Having an expert picking the properties
2) Without the hassle, costs and obligation of maintaining an individual property
3) Not incurring the individual property risk due to lack of diversification (because many properties, mortgages, and/or locations may be owned by the REIT)
4) It being a marketable asset that can be quickly bought or sold through a major exchange.
5) A REIT by itself is a diversified investment

Summary
Although I do not recommend buying individual real estate properties as an investment, real estate as an asset class usually improves your portfolio diversification since it has a low correlation to the general market. Therefore, generally I do recommend committing a portion of your portfolio to this class, not as a market call on this sector, but based on my belief in its ability to dampen the overall volatility of your portfolio in the long term.

Please note while I am not a big fans of REITs right now, especially commercial property REITs, I should be in the future as the economy improves and supply lessens due to lower prices.

Fiduciary means trust.

(I am reprinting this important article that my friend Chuck Stanley wrote on this topic. I believe this is a significant concept that most people do not know about or consider when working with their financial planner or advisor.)

The word fiduciary can be described in many ways. From its Latin root it can be distilled down to one word, TRUST. Virtually all definitions of the word fiduciary are derived from the concept of TRUST.

Within the financial services field the term fiduciary has both personal and legal connotations. On a personal level, when a financial advisor works with a client in a fiduciary capacity, the advisor must place his client’s best interests first and foremost; above both the advisors own interest, or his firm’s interest.

On a legal level, working with a client in a fiduciary capacity imposes a legal duty to always work in your client’s best interest. Any violation of this fiduciary responsibility could result in litigation with civil consequences. It is easy to understand that this level of commitment with a client should not be undertaken lightly.

Given the obvious benefit to the consumer of working with a financial advisor in a fiduciary capacity, one would think that virtually all financial advisors would offer to serve their clients in this way.

Why would a client work with a financial advisor who would not accept this level of commitment?

The sad, and surprising, fact is that most of the well known, mainstream financial services firms you see advertised every day will not accept fiduciary responsibility for their clients. In fact, they are actively lobbying to eliminate any fiduciary requirement in the financial services industry.
 
The Suitability Standard

Most well known, mainstream financial services firms prefer to work with their clients based on a “suitability standard”. This lower standard provides that the financial advisor, and his firm, may only make recommendations that are “suitable”, as opposed to what is best, for the client based on their profile.

For example, there may be five similar investment products that are suitable to meet the client needs. Of the five products there may be one that is clearly the best selection for the client, but the financial advisor, under a suitability standard, is free to select any one of the five products. You might ask why this would happen. It’s possible that one of the other products could be the financial advisor firm’s proprietary product. The other products might pay out a higher commission or fee to the advisor for recommending them. It might be that their recommendation is the best product for the client.

The point is, with a suitability standard, you can’t be sure why the financial advisor is recommending any product.

More importantly, you have no legal recourse if the recommendation was merely suitable, but clearly not the product to serve your best interest.

Before you work with a financial advisor, ask if they will work with you in a fiduciary capacity.

If they indicate that they will, ask for written documentation of this for your file. If they indicate that they won’t, or can’t, because of their firm’s policy you should give extra consideration before working with them.

I just got back from my brother’s wedding in Milwaukee. It was an awesome weekend!

I am one of seven children. I am the third oldest of four girls and then three boys, in that order. It is becoming more and more rare for my family to all get together. We live all around the country and lead busy lives.

My family is so important to me.

I treasured every moment of spending time with each member of my family, my 8 nieces and nephews and all the incredible significant others who have joined our family. We had so much fun!

I just had to post how grateful I am for the beautiful memorable weekend and my amazing family.

“There is only one happiness in life, to love and be loved.”

-George Sand

Every aspect of our life is influenced by money –

where we live, the food we eat, our job, our house, the clothes we wear, the work we do, the gifts we give, our friends, even our spouses and the number of children we have, are all affected by money and how we view it.

So, do you have a healthy happy relationship with money?

Try thinking of your relationship with money like a personal relationship.

What are the keys to success in your happy and healthy personal relationships? Now apply these concepts to your relationship with money. Some of the keys to success that I apply to both my personal and financial relationships are:

1. Respect

Treat money with respect. Just like any person, it wants to and needs to be treated with respect. Yes, money is important and powerful. Recognize that. Now balance that with the fact that it does not define who you are. Money cannot change what your values are, your talents, and what you care about.

A good relationship enhances who you are and brings out the best in you.

Money is similar, it is a tool that allows you to be, do and have MORE of what you want. It should also enhance your life and highlight your passions, talents and values.

2. Understanding

It is always helpful in a relationship with another person to understand where they come from and what they are thinking. You need to communicate with the other person. The more you understand about money and your money situation the more power you have to make wise, respectful and sympathetic decisions.

You are empowering yourself if you come from a place of knowledge instead of a place of unknowing and fear with regards to your money. This communication and connection will enhance your relationship.

I want to stress that you do not need to know everything. I recommend that you surround yourself with people and financial advisors you trust and who can help provide the knowledge you need.

Educating yourself also contributes to your understanding. Continue to learn and ask questions about your finances to help improve your relationship with money and build your confidence.

3. Attention

Money (like people) LOVES and demands a level of attention. Money will get your attention one way or another. It can be positive or negative attention. You get to choose.

I like to think of this aspect as similar to a parent child relationship. Your child will do things to get your attention, even if it is negative attention. Money is the same way. If you ignore your money relationship and avoid it, it will eventually require your attention.

Just like scheduled date nights with your spouse, I recommend that you schedule time to regularly check in with your finances so you know where you stand.

There are other aspects of your relationship with money that I will discuss in future articles.

Respect, understanding and attention are all concepts that are important in dealing with people. They provide an initial guideline to assist you in improving your relationship with money. Thinking of your personal relationships and how you want to be treated is an analogy and powerful example to apply in your relationship with money.

Many people are uncomfortable in their relationship with money.

Their best selves are not seen in their relationship with money. If this is you, think about how you can change your view of money and your relationship with it.

What actions can you take to change this?

Having a healthy relationship with money has the power to change and affect every aspect of your life.