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May 2022

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Investing in Real Estate Will Help You Build a Diversified Portfolio

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Investing in Real Estate Will Help You Build a Diversified Portfolio

The stock market has surged since April 2020, but you only have to look back to March 2020 to see that indexes can plummet in the blink of an eye. On March 11, 2020, the Dow Jones entered a bear market just a few weeks after trading near all-time highs. While the market recovered quickly in this instance, bear markets typically last a lot longer and volatility still remains.

For that reason, investors are constantly searching for ways to reduce the fluctuations in their portfolios and find ways to make their portfolios more resilient. Below, we explore some of the ways you can do that through diversification into real estate.

Building Your Portfolio

The saying, “don’t put all of your eggs in one basket” is essentially an appeal for diversification, which in the financial world, is defined as the process of mixing a variety of investments within a portfolio. A diversified portfolio is invested in a number of asset types and investment vehicles.

Not all diversified portfolios are created equal, however. If you bought 20 different tech stocks, for example, you could argue that you are diversified. But the assets are likely to be highly correlated, increasing your risk in the event of a downturn in tech stocks. But by diversifying across uncorrelated asset classes, one or more of your investments are likely to outperform during tough times, keeping your portfolio afloat.

The goal behind diversification is maximizing returns for a given level of risk.

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A diversified portfolio is invested in a number of asset types and investment vehicles.

How Does Real Estate Investing Help You Diversify Your Portfolio?

The traditional portfolio has been made up of 60% large-cap stocks and 40% bonds. This breakdown does make a lot of sense—stocks and bonds have a low correlation—but it may not be the best way to maximize risk-adjusted returns. While bonds may still deserve a place in your portfolio, investors are sacrificing returns with this low correlation asset in our current low-yield environment. For that reason, you may want to consider other types of investments.

Private Real Estate Is Often An Excellent Addition To Your Portfolio

Real estate not only has little performance correlation with the stock market, but it also has historically strong returns, making it a valuable addition in the quest for diversification. This is especially true for private real estate, as publicly traded real estate, like REITs, still show correlation to other public assets.

The Yale Endowment is a perfect example of how this can play out over time. For decades, the endowment had excellent risk-adjusted returns. The Chief Endowment Officer, David Swensen believed in an 80% allocation to a variety of traditional assets and a 20% allocation to alternative assets, such as real estate.

Real estate not only has little performance correlation with the stock market, but it also has historically strong returns

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Use a Mix of Real Estate Assets to Diversify Your Portfolio

There are several ways to invest in real estate including doing-it-yourself, private equity funds, publicly-traded REITs, and online real estate platforms.

You may be able to use any of these investments to effectively diversify your portfolio.

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The saying, “don’t put all of your eggs in one basket” is essentially an appeal for diversification.

Bottom Line

The bottom line is that the public markets (stocks) have historically been a volatile asset class and this current period is no different. By diversifying into real estate, you can increase the chances that you only experience mild fluctuations in your portfolio—instead of extreme volatility.

This article was originally published in www.investopedia.com

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How to Diversify Your Portfolio With Real Estate

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How to Diversify Your Portfolio With Real Estate

Real estate can be a valuable addition to almost any portfolio. This is due in large part to the stability it provides in relation to other assets. As a tangible asset with historically strong performance, real estate can offer a balance to more volatile assets such as stocks and cryptocurrencies, which over time can help drive performance for your portfolio. Whether you’re just starting to think about real estate investing or you’re already a seasoned investor, knowing the top trends—and some of the benefits of this unique asset class—can be a great way to determine which investments are right for you.

Building Your Portfolio

With a keen understanding of the real estate investment landscape in place, it’s time to think about building your portfolio. Here are some of the key things to keep in mind as you consider investment options and potential returns.

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As a tangible asset with historically strong performance, real estate can offer a balance to more volatile assets such as stocks and cryptocurrencies.

1. Take A Strategic Approach

Keeping your short- and long-term goals in mind can help you develop an effective investment strategy. Be sure to factor in your risk tolerance and your other portfolio holdings.

2. Focus on Strong Passive Income

Investing in private real estate can help you achieve strong long-term yields and a stable income. On average, private real estate holdings outperform stocks, bonds, and even REITs.

Keeping your short- and long-term goals in mind can help you develop an effective investment strategy.

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3. Consider Risk-Adjusted Return Potential

Balancing risk with growth potential can be challenging, but the right investment mix can help you achieve it. Incorporating private real estate holdings into your portfolio will offset risk while helping to maximize returns.

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Investing in private real estate can help you achieve strong long-term yields and a stable income.

4. Plan for Robust Diversification

True diversification requires that you diversify both within and across asset classes. Opting for a diversified real estate portfolio can help you find long-term stability even amid market swings.

This article was originally published in www.investopedia.com

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Using a Home Equity Loan to Start an Airbnb

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Using a Home Equity Loan to Start an Airbnb

The world of travel has changed quite a bit in the last decade—hotels aren’t always the best choice for many travelers, especially families. Short-term vacation rentals like Airbnb, VRBO, and Vacasa can be a great way for private citizens to get into the hospitality game. But unless you’re interested in renting out your primary residence, purchasing a property that will be attractive to travelers is the first step in the process.

If you already own a home, you already have an excellent tool for financing that property: your home equity. A home equity loan can be a viable method of obtaining a hefty downpayment on your new investment property.

What Is a Home Equity Loan?

A home equity loan is based on the equity you’ve built in your home. Equity is determined by the current value of your home minus the amount you owe on your mortgage. Since home values depend on various market conditions, such as available stock and developments in the area, your equity can ebb and flow.

A home equity loan uses that equity as collateral for the amount you want to borrow. Typically, you cannot borrow the total amount of the equity available—80% is the standard rule of thumb.1

Home equity loans are considered secured loans since they have physical collateral attached and come with attractive interest rates.

The process of obtaining a home equity loan is similar to that of applying for a first mortgage. The home’s value has to be established through an appraisal, then terms are decided. Home equity loans are paid in a lump sum of cash and have to be repaid over time on a fixed payment schedule.

In addition to the amount you borrow, you’ll also pay interest on the loan as well as closing costs that cover the preparation of the loan, origination fees, and recording fees. Some lenders offer the option of paying points, or prepaid interest, at closing. This can lower your overall repayment amount but will increase your closing costs. You can choose how many points to take, if any, with your lender.

The beauty of home equity loans is their flexibility. Since they are paid in a lump sum and repaid over time, they can be used for any purpose—home renovations, a fancy vacation, or even buying a short-term rental.

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Equity is determined by the current value of your home minus the amount you owe on your mortgage.

How to Buy a Short-Term Rental with a Home Equity Loan

Once you’ve applied for and been approved for your home equity loan, it’s time to decide how to use the funds. If buying an investment property is the goal, look at the property’s price. See if your loan is enough to cover the entire cost, allowing you to make an all-cash offer. If it’s not, you can still make a good down payment and have a nest egg to cover the setup needed to start your business.

Depending on where you’d like to buy a short-term rental, having cash available can give you significant buying power. If you’re looking at properties out of the country, this can help you avoid the hurdle of finding a local lender. If you’re looking in the United States, an all-cash offer can help you seal the deal in a bidding war since you’ll have secured capital already.

Since you won’t be living in your rental full-time, many lenders want a more significant downpayment —typically 20%-. Mortgage insurance is not available for rental properties, so making that large a downpayment may require funding from a home equity loan.

One thing to remember is that buying the property is just one expense. Funds from a home equity loan could also be used to renovate a property or furnish it if it’s already in good structural shape. Making it attractive and user-friendly is critical to keeping a short-term rental booked. Also keep in mind recurring costs like cleaning services, insurance, and upkeep.

Since many vacation properties may not have a 100% occupancy rate, you may also leave some funds as a cushion for that time. Can you afford to have a bad month?

Pros and Cons

While a home equity loan has a lot of pros—flexibility and low interest rates chief among them—there are also cons to taking this route for your short-term rental kingdom. While you will have a lump sum of money, unless you buy your new property outright, you will have three monthly payments that could be quite sizable: your mortgage, home equity loan, and your new mortgage on a short-term rental. Make sure that your monthly cash flow can support multiple payments.

One thing to remember is that buying the property is just one expense. Funds from a home equity loan could also be used to renovate a property or furnish it if it’s already in good structural shape.

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Frequently Asked Questions

1. Can I Buy Only U.S. Property with a Home Equity Loan?

Once you have secured your loan, you can use the funds for anything, including buying property overseas. Having cash may make it easier to buy foreign property. Check your future location for specific details.

2. What Is the Normal Repayment Term of a Home Equity Loan?

A home equity loan typically has a variety of loan terms, including five-, 10-, 150, 20-, and 30-year terms. Keep in mind that your interest rate and the monthly payment will depend on the term length.

The Bottom Line

Home equity loans are a flexible and relatively affordable way to access a large sum of cash at one time, which makes them ideal for purchasing or making a down payment on a short-term rental. Just be aware of how much debt you are taking on. If you expect to be able to repay your home equity loan using profits from your rental, you may have to contend with vacancies and volatile profits. Have a plan in place if your rental isn’t immediately successful.

This article was originally published by Rachel Murphy in www.investopedia.com