Question

Assume you've just inherited $100,000 and wish to use all or part of it in real estate investment.

a. Would you invest directly in real estate or indirectly through something like a Real Estate Investment Trust (REIT)? Explain your answer.

b. Assuming that you decide to invest directly, would you invest in income-producing property or speculative property? Why? Describe the key characteristics of the types of income-producing or speculative property you would seek.

c. What financial and non-financial goals would you establish before beginning the search for suitable property?

d. If you decide to invest in real estate indirectly, which type(s) of securities would you buy and why?

Answer 1

a) One shall invest in REITS as they are liquid and also have investment in various real estate properties which provides diversification and reduces risk.

b) One would invest in an income producing property as it will provide liquidity as well as lesser risk. For example investing in a housing compartment in a area where tennants are credit worthy and are established. This will lead to low credit risk as well as sustained income with high occupancy ratio.

c)Financial goals related to liquidity requirement, risk taking ability and income requirement and capital gains shall be taken before searching for a property.

d) One shall buy into REITs or REOCs. They have advantage of pooling in funds and provide efficient and sustainaible diversified use of funds. Thus they provide returns with much smaller risks.