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The Role Of Real Estate In Your Investment Portfolio

By Lisa Scontras

Wall Street’s volatility coupled with uneven economic growth have many investors scrambling for the best way to recoup their losses, re-balance their portfolios and reduce any risks.

While there is no secret formula that guarantees your investments will flourish, portfolio diversification – the practice of reducing risk by investing in a variety of assets – is a good way to limit your losses and minimize the fluctuations of investment returns. But determining exactly how to allocate your assets to ensure that your money will be there when you need it is indeed the million-dollar question.

Ultimately, where you choose to invest your money depends largely on your personal circumstances and how much risk you are willing to take. But whatever your choices are, one local investment strategist strongly advises you consider real estate for your portfolio.

Kenneth L. Miller, senior vice president of the Investment Services Department at First Hawaiian Bank, says everyone has a different set of goals and varying amounts of time needed to reach them. If you are 25, for example, your asset allocation will be different than if you’re 55. Still, several indicators point to now being a good time to make real estate a part of your investment portfolio.

“After two big bear markets over the last decade, the risks of the stock market are better appreciated,” says Miller. “Since the early 1980s, it’s been relatively easy to make money in the bond market – interest rates were gradually falling so the prices of bonds went up. Now interest rates are near bottom, so returns for the bond market will inevitably be lower.

“Equity market (the stock market) returns will likely be lower as well,” he says. “For those reasons, it’s important to be looking at alternative investments.”

According to Miller, evaluating investments is a function of expected return versus potential risk.

In addition to your return on investment, or ROI, and risk assessment, the extent to which your investments correlate with other assets should also be carefully considered. Ideally, you want to be well-diversified so that if the stock market goes down, your investments won’t all go down as well. One of the advantages of investing in real estate is that it is fairly uncorrelated with other asset classes.

Leverage is another advantage to investing in real estate. Your only investment is your cash-down payment, yet your return is on the full-market value of the property.

“For the average investor, real estate may be the easiest area to use leverage – borrowing money to amplify returns,” says Miller.

“And, of course, there is also a tax break on mortgage interest payments, which makes the cost of borrowing effectively lower.”

Another advantage is that, unlike stocks, investing in real estate allows you to live in your home.

Of course, investors should take note that real estate is not as liquid as stocks or bonds.

“You can buy and sell stocks in seconds,” Miller says. “If you decide to sell real estate, it takes time.”

For that reason, he says real estate is a long-term investment. Because real estate values tend to appreciate in long cycles, the investor must be prepared to leave his or her money there for a long time.

With 30-year fixed mortgage rates currently under 5 percent, Miller says the timing is right to invest in real estate.

“With rates so low, and likely to go up in the future, it looks like a good time to lock in a good rate,” Miller says. “We’re probably near the bottom of the current real estate cycle, which means that historically this is the best time to invest.”

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