Know how to make monthly income from a real estate investment group? If you’ve never heard of a real estate investment group, you may be missing a good way to create monthly income. In "U.S. REITs As An Asset Class In International Investment Portfolios," Stephen R. Mull and Luc A. Soenen write that "real estate provides a return comparable to the returns on bonds and stocks and also has low correlation with that asset class." Indeed, historical returns bear this out. According to the National Association of Real Estate Investment Trusts, the FTSE NAREIT US Real Estate Index averaged 10.31% over the last ten years and 9.24% over the last fifteen years. It’s a volatile sector, so let's list some of the key features of a real estate investment group:
- Think mutual fund, but with real estate. Real estate investment groups are not mutual funds, but if you imagine a mutual fund, you’re headed in the right direction. Your money is pooled with funds of other investors to purchase properties, much like a mutual fund. The advantage of this approach? Diversification. In market downturns most property values decrease, but some depreciate more than others. By purchasing many properties investors increase their chance of safety. The disadvantage? If a single property posts huge gains these may be diluted by unprofitable investments.
- Check the dividend schedule. Some real estate investment groups pay monthly dividends. Some pay quarterly. Others don’t pay dividends. In real estate Investment groups you may be required to file a K1 (USA based investors) with the IRS each year. This tax form can be a pain because companies are allowed to send this much later than the end of January, the normal date for 1099 and dividend income forms.
- Understand redemption periods. A redemption period is the date your initial investment may be returned to you. You’ll need to understand how and when you're eligible to receive back your principal and when you may see any gains. Generally, this is detailed in a company’s strategy to flip the property and will be in the sales literature. Some investments look to unload property after seven to ten years because historically, buildings begin to age and the neighborhood evolves. If you aren’t comfortable locking up dollars, this investment type probably isn’t for you.
- Make sure this is only ten percent or less of your overall investment portfolio. You don’t want to get caught with only one management team managing a large portion of your portfolio (think Bernie Madoff). Many real estate investment groups have a requirement that your investment won’t be more than ten percent of your overall portfolio. They usually recommend that your overall exposure to real estate isn’t more than twenty percent of your investment portfolio. This isn’t just legal jargon. These stipulations are for your safety. Invest heavily in illiquid investments and you’re asking for trouble.
- There are two general flavors of real estate investment groups: real estate investment clubs or a Real Estate Investment Trust. According to the National Association of Real Estate Investment Trusts, a REIT is a company that owns, and in most cases, operates income-producing real estate. A REIT follows specific covenants and legal parameters. Individual investors generally won't control decisions around properties. A real estate investment club is a far more loose collection of people pooling money to purchase property and individuals play a part in investment decisions. The organization REI Club lists over 350 clubs operating around the United States.
Many people get discouraged with real estate investment groups because they don’t fully understand the liquidity options and disbursement rules when they invest. They also don’t understand how the club or REIT invests money. By having a firm grasp on these concepts you’ll go in with your eyes open and better enjoy this type of investment.
Mull, Stephen R. and Seonen, Luc . "U.S. REITs as an Asset Class in International Investment Portfolios," JSTOR.org.
Wells, Leo F III. "In The Land of Dividends: Many clients rely on dividend-paying assets. A small allocation of real estate investment…." Financial Planning. 01 Oct. 2001: 1.