Tuesday, July 14, 2009

A portfolio perspective on real estate investment

Real estate does not in isolation from other possessions and pursuits. For example, owing rental houses may be a good investment for person with financial liquidity, stable job, low expected mobility, and the time and skill to manage the properties. But it can be risky and unrewarding for a person with low financial liquidity, a changing job outlook, a time-intensive job, or the need to be able to relocate upon short notice. For similar reasons, home ownership makes good investment sense to most households at some point in their life, but not to all households at all times.
Real estate investment in the context of the owner's other assets and the owner's overall situation may be thought of as a portfolio perspective on real estate investment-that is,the real estate investment is valued in context of all the other assets and characteristics of the investor's portfolio, including human capital .From the example above,it should be clear that this portfolio perspective can be very important to consider in any real estate decision. As further examples,the desirability of investment in home improvements can depend on the needs and expectations of the household. A family with children a bout to leave home certainly views the addition of a swimming pool or another bedroom differently than a family with young children. A household that is mobile and expects to move within a few years also will view a home expansion differently from a household that expects to remain in the house for a longer time. Similarly, a mobile family is more likely than a nonmobile family to place greater value on a residence that is easily resalable.
The portfolio perspective is important in commercial real estate as well. For example, a person who expects to move frequently is less likely to be comfortable investing in local rental properties because of unfamiliarity with the local market and the risk of managing property at a long distance. This person might find investment in real estate through a publicly traded real estate investment trust (REIT) a much more a much more satisfactory option. In addition,the knowledge and experience of the investor can be very important in determining what is a good real estate investment? For example, persons familiar with industrial and manufacturing activity may want to restrict investment to industrial properties because they have a better chance of detecting, assessing, and mitigating risks in that sphere.

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