Am I Ready to Invest in Real Estate?
June 23, 2017 by Brandi Jackson
Investing in real estate provides the incredible benefits of asset diversification. It also allows for allocation to investments that can be expected to be liquidated over a specific time horizon. This greatly facilitates financial planning as investors enter different phases of life.
These demonstrated financial benefits are counterbalanced by some of the characteristics of real estate investments. Real estate, for example, is highly illiquid. This means it cannot easily be converted to cash, often at any price. Except for active house flippers and those lending into that market, it is also a relatively long term investment. This makes it unsuitable as a savings vehicle for short term financial goals.
Balancing these two factors has become a more important issue for new investors with the emergence of marketplace lending platforms. These online investment, sites such as Sharestates, have eliminated the high minimum investments that were previously a characteristic of real estate. Now young and newer investors have access to investment real estate as a viable strategy.
Allocating Assets to a Real Estate Investment
First things first, you need to question when is the right time to allocate assets to a real estate investment. The answer is that real estate is a good choice very early. There are really only two basic financial allocations that should be considered as taking a priority over a real estate investment.
The first is an emergency fund of approximately 6 months living expenses. These funds should be kept in a checking or other highly liquid account. A modicum of interest can be earned if half the amount is kept in a 3 month CD. However, this emergency fund must be readily available and not allocated to any investment that can possibly lose value due to market fluctuations.
The second financial allocation is to an employer-sponsored 401(k) plan. Most employers offer a match on employee contributions, and although these match funds have a vesting schedule they still represent a 100% on investment before market performance. This, in addition to the tax savings and tax deferred growth, make contributions a great financial move.
Diving in to Marketplace Lending
After those two financial steps, the new investor is ready to consider an allocation to real estate. Marketplace lending (MPL) platforms and electronic Real Estate Investment Trusts (eREITs) are appropriate venues to consider. These provide a level of professional review and evaluation without which success is a matter of pure luck.
Reviewing potential investments on marketplace lending platforms means more than just looking at the anticipated return. It is very important to consider the anticipated time horizon of the investment. This allows the allocation to be coordinated with a mid or long term financial goal, meaning a goal that is longer than two years.
Of course, this means the investor has set some financial goals and has a reasonable expectation of how long it will take to accomplish them. This, in turn, requires a household budget and some investment acumen. A lack of understanding of those topics strongly suggests that the investor has some homework to do before moving into real estate investments.