The first week of May I had the pleasure of speaking at the National Association of Personal Financial Advisors national conference in Chicago. This was by far the most attended national conference the exclusive group of pure fee only financial advisor professionals has put on to date. While it was a pleasure to present, it was far more enjoyable to sit back and learn from the other presenters!
One of the presentations I enjoyed was on the subject of real estate investing – more specifically REITS and REIT mutual funds. There are different forms of real estate investing:
- personal residence
- second residence
- rental home
- direct commercial property
- limited partnerships
- REIT – publicly traded and non-publicly traded
- real estate funds
The factors which may influence your investment in real estate or REIT mutual funds are:
- complexity of ownership
- custody of assets
- diversification of your portfolio
- up front and ongoing due diligence on the property
- E&O insurance coverage
- income generated
- liquidity of the investment
- minimum investment size
- portfolio manager experience and style
- the portfolio returns or expected returns
- taxation of the type and form of real estate entity
- how is the entity or investment valued initially and ongoing?
REIT mutual funds should never be purchase if they have a commission associated with them – but that goes without saying for our practice. Mutual fund fees and commissions always directly reduce your investment performance.
As a fee only financial advisor we never recommend commission based products. The presenter felt the same – Paul with Mallard Advisors recommended if the fees are difficult to understand or if they can’t be calculated easily avoid the investment!
In addition, reit mutual funds have a net asset value – or NAV. The properties are worth a certain amount at any given time, yet the value of the fund may stray from that net intrinsic value because reits aren’t valued daily or literally by the second as other stocks and bonds are. This makes reit mutual funds more challenging to assess.
There are many factors to consider with REIT mutual funds and other types of real estate investing. There is no clear cut answer as to whether REIT mutual funds are right for you or not.
In our private practice and through our online investment plan and review service, we always recommend REIT mutual funds for a component of diversification in every investors portfolio (unless circumstances such as overexposure to individual properties exist).