Financial Learning Center
In addition to actually buying real estate, you can buy into real estate investments in other ways.
Real Estate Investment Trusts
A real estate investment trust, or REIT, takes money from a number of investors and invests in all kinds of commercial and residential properties. The REIT provides professional managers that oversee property acquisitions and maintenance of the properties held in the portfolio.
You can buy individual REITs, but you may want to consider a REIT mutual fund. It invests in many different types of real estate, diversifies your real estate holdings even more, and subsequently reduces your risk. Keep in mind that a REIT mutual fund is still a real estate investment, subject to the ebbs and flows of the real estate market; it generally carries more risk than other mutual fund investments.
REITs are potentially ideal for people who lack substantial financial resources, or those who don't want to take on the responsibility and the burden of owning and managing investment property, but still want to invest in real estate. REITs are securities traded on major stock exchanges.
Another way to buy into real estate is to purchase an interest in a real estate limited partnership, in which a group of investors gets together to buy property as a partnership. A limited partnership is owned by one or more general partners, who oversee the partnership's operations, and by one or more limited partners that have no say in the management and operation of the partnership. The word "limited" means that there's limited liability for limited partners; their risk of loss is limited to their investment and any agreed future contributions. Typically, these partnerships are put together to build shopping centers or low-income housing. The sales pitch is that they have special tax deductions available to developers that are passed through to the investor. But many people aren't in high enough income brackets to take full advantage of the deductions.
Limited partnerships can be purchased through stock brokers. Because they are laden with high sales commissions and management fees, your investment income will be reduced accordingly. Limited partnerships are not liquid. In other words, you will have a very hard time trying to sell your piece of the partnership to a willing buyer at a fair price. In order to get out, you typically will have to wait until the partnership is liquidated.
IMPORTANT NOTE: Real estate limited partnerships lost substantial amounts of money in the past, for a variety of reasons, including the impact of changes in federal income tax legislation.
The bright side is that you only stand to lose up to the amount you invest in the partnership. If you are considering investing in a limited partnership, plan on holding the investment at least five years and perhaps even 20 years.
Timeshares are arrangements where you invest in a property, typically a vacation property, for a particular time each year; thus you may own one week a year of a ski chalet, with others owning the other 51 weeks. Timeshares have become very popular, and have developed their own marketplaces for trading shares, but they should not be viewed as an investment. Few people make money selling their shares. Keep in mind that the cost of a time share includes sales commissions, administrative fees and profits for the development company.
IMPORTANT NOTE: Many timeshare resorts have gone into bankruptcy.
Like many other investments, there are fees and expenses associated with nontraded REITs. These vary from provider to provider, and investors should review this information carefully with their financial professional before making any investment.
For more information on this topic, see the section on Buying Real Estate.
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