The Best Way To Take Advantage Of Property In An Investment Portfolio
It is always a good idea to include property in an investment portfolio because it offers low volatility and high returns. The greatest advantage of its inclusion is because it is negatively correlated to stocks and bonds as this helps to lower risk. It is also a good choice when the economy is poor and interest rates are low because income can still be derived from dividends.
There are two distinct ways to make use of property. Publicly traded REITs or Real Estate Investment Trusts have different benefits to privately owned real estate or non-public trusts. Either could be used for different reasons but it has been shown that using both together has even greater benefits that either option on its own.
Working out how much of either should be purchased can be done using mean-variance analysis. For this to be done it is necessary to make use of a reliable index. This is easier to achieve with REITs as there is ongoing data being generated by regular trades. With privately owned real estate it is more difficult to get a clear idea of volatility as they are not bought and sold on a regular basis.
The NPI index is used to track private market trends. This is only released on a quarterly basis however as data needs to be gathered on the actual value of individual properties. As these are unlikely to be sold on such a regular basis the value is very often determined by appraisals.
The purpose of diversification is to mitigate risk by not relying to heavily on any single option. Making the best of the advantages and disadvantages of different options can decrease the risks but it cannot completely overcome the overall economic situation. All stocks and especially real estate can be affected by fluctuations in the GDP for example. Property in an investment portfolio is still remains one of the best hedges against inflation however.
Apart from having specific benefits for diversification there are many other reasons to have property in an investment portfolio. It can show very good returns on its own and in a study by Mueller and Mueller it was found that REITs out performed the S&P 500 over a 25 year period. There might be higher costs associated with taxes, asset management fees and transaction fees but in accounts when there are tax advantages such as with 401K's or IRAs then the returns are even better than usual.
The total allocation of property in an investment portfolio could be as high as 44.5% according to a study by Feldman (2003). The majority should normally be made of private real estate because it has a more negative correlation to markets than REITs do. In his study the best combination was 2/3 real estate and 1/3 REITs.
Adding real property in an investment portfolio has some definite advantages, including less likelihood of property depreciation. Obtaining the services of a quantity surveyor Gold Coast company helps to valuate your property.
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