You can diversify your investment portfolio by investing some portion of it in real estate. This can be accomplished in a number of ways, ranging from a broad approach to more specific targets:

• Buying mutual funds whose mandate is to acquire stocks of real estate companies and developers.

• Investing in exchange traded funds (ETF’s) that mirror an index composed of real estate stocks.

• Placing your funds with mortgage investment companies that typically invest in specific developments.

• Personally acquiring and managing investment properties directly.

• Becoming a source of funds, either as lenders or in joint ventures with real estate entrepreneurs.

Full disclosure here – I am not a financial advisor, nor am I professionally qualified to provide investment advice. My intent is simply to share with you some of the conclusions I have reached through my personal investment journey. You may find my views and thoughts of some use to you, or you may not; that is for you to decide.

But perhaps the first question is WHY would you invest in real estate?

1. There is always a demand for real estate, be it for industrial plants, office towers, shopping malls, or for residential purposes.

2. This demand tends to increase with population growth.

3. Typically, the laws of supply and demand apply, thereby affecting value.

4. Real estate represents a “hard” asset, usually tied to quite specific properties.

According to an influential US real estate entrepreneur, real estate is the # 3 billionaire-maker globally! This is terrific, but how does this help you decide which avenue you should follow, once you have decided that real estate may be a sound way of diversifying your investment portfolio?

Real estate represents about 15% of my investment portfolio, not including personal properties. The smaller portion is with real estate investment trusts, while the balance has been placed in private joint ventures on specific properties. Over time, I have concluded that working with real estate entrepreneurs provides me overall better returns, with security of investment.

How have I reached these conclusions? While the following list of investment types is not exhaustive, I believe it covers the most well known approaches.

Mutual Funds
For people who don’t have a lot of time to do the research and pick individual companies in which to invest, many choose to buy mutual funds. The funds are managed professionally, based on specific criteria, and by spreading the investments over a larger number of companies, the risk is also spread and the returns are averaged.

By example, without naming the specific real estate fund managed by a major Canadian bank, the reported returns (Morningstar) have been reasonable but, in my view, not spectacular.
10-year return 5.47%
5-year return 6.62%
3-year return 2.54%

While it is never totally clear to me whether these returns are before or after the management expenses charged to operate the fund, in this particular case the annual MER is 2.97%!

It needs to be pointed out that, within the 10-year period, the 2008/2009 recession has had a large impact on results. However, until the latter part of 2015, most of the recession impact had been recouped.

ETF’s – Exchange Traded Funds
In my opinion, a much less expensive approach to spreading risk is through the use of ETF’s – funds which mimic an index and can be traded just like a regular equity stock. In this case, the fund includes virtually all the firms within a specific sector, without managerial intervention – the cost for a couple of Canadian REIT ETF’s is about 0.6%. The following displays the results (Morningstar) for the better of two such funds:
10-year return 6.03%
5-year return 5.88%
3-year return -0.69%

Mortgage Investment Corporations
While I have not researched this type of alternative fixed income investment, these pools of capital typically invest in commercial and/or residential mortgages. Lacking any more recent results, a June 2013 MoneySense article on such investment companies reported a range of returns from
5.00% to 7.79%,
with managements fees from 0.00% to 1.35%.

Comparably, these are better returns over a 3-year period than either example of mutual funds or ETF’s reported above.

Investment Properties
My conclusion, after a good deal of research and pondering, is that you are better off staying away from these, unless you have:

• a good deal of money to invest – at least 25% of each property cost;
• experience is selecting and managing these properties; and
• a lot of time to devote to the effort.

Private Real Estate Funding
My conclusion is that the better approach is to work with real estate entrepreneurs who put together lucrative real estate investments such that those who furnish the funds make safe, consistent returns.

As an investor, my prime concerns are:
1. What is the investment opportunity and do I understand it?
2. How much money do I have to put up?
3. What return can I expect to make?
4. When will I get my money back?
5. What happens if…..and what security do I have?

I have concluded the two specific real estate investments in which I have participated address these concerns.

Future articles will explore the specifics about the approach, the expected returns, and the security of the investments.

“ree is the pseudonym of a shareholder in Grand River REI Inc., a real estate investment corporation”