Koreans living in the United States often think of investing in houses or commercial buildings to receive rent for retirement. Real estate investment is much safer (?) than stock investment because you can hold and touch an actual building, and expect the real estate value to increase.
Last year (2021), the rate of return of a real estate company stock investment (REIT) was 40.5%. It is by no means easy for an individual to receive such a high rate of return by investing in real estate.
The basic principle that does not change when investing is ‘Diversified Investment’. I think everyone knows about diversification. However, when investing, he does not consider ‘diversity investment’ at all. This leads to investment failure.
Real estate investment accounts for a large portion of total assets. Investing in a specific stock among several stocks. How great would it be if the real estate you invested in hit the jackpot? However, the opposite result may occur.
Buying real estate is usually near where you live. If you live in LA, you will invest in LA. California is a small part of the state. Investing in other areas of the United States, such as New York or Austin, is almost impossible. It goes against regional diversification.
There are various types of real estate investment, such as houses, apartments, hotels, offices, condos, shopping malls, etc. Because there is not enough money to invest, one invests in one of several real estate properties. This also goes against diversification.
If you violate the basics of investing, ‘diversity investment’, not once, but three or four times, there is a greater possibility that such an investment will go wrong. The above is only considered in the concept of ‘diversified investment’.
A person who owns real estate only thinks about the amount of monthly rent and does not calculate the profit and loss accurately. You must account for all expenses, including the cost of buying and selling real estate, property taxes, insurance premiums, repairs, and taxes on income. Investing in real estate should also consider that assets are tied together with real estate. If you need a lot of money for urgent business, you have to sell the real estate. When you dispose of it, you must ask for the benefit of amortization expenses you have received.
Real estate investing requires a lot of expertise. If you can’t afford to hire a janitor, you’ll need the ‘handy’ to fix everything yourself. It’s a 24 hour wait. In addition, various real estate-related documents such as name change, basic tax laws, and continuous management are required to ensure smooth rental. If the tenant does not pay the rent on time, or causes a night escape, dispute, etc., the stress and financial loss caused by it is unknown unless you experience it.
Let’s take a closer look at real estate financial asset investment. For example, the Vanguard Real Estate ETF consists of 168 US real estate businesses. It means that the investment is diversified into 168 companies rather than one or two real estate companies. Real estate is also diversely distributed in hotels, industries, offices, private homes, etc., and is distributed throughout the United States. The fact that diversification is done properly means that the investment risk is low.
Investment in real estate financial assets was not the only one with very high returns last year. The average annual average for the past 10 years is 11.5%. If an individual investor had invested $500,000 in this stock, that’s an astonishing return that has tripled to nearly $1.5 million in 10 years. This is the reason why we have long recommended investing in real estate with financial assets that have a much lower investment risk while receiving such a high rate of return.
Real estate investment is a difficult investment that requires expertise. Investing in real estate for living expenses or pastime after retirement is a very risky idea. That’s why it’s important to think carefully before investing a large portion of your assets in real estate.
Myung-Duk Lee, Ph.D., Registered Investment Adviser (RIA)
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