Do property funds offer a safer alternative to direct real estate investment?

If you are looking at any type of long-term investment, whether a pension plan or some kind of investment fund, there is no doubt that either directly or indirectly property will play a part. Real estate has become a significant backbone of traditional investment portfolios but there is the age-old question of whether you should invest in property funds or direct real estate.

Perhaps the first factor to take into consideration is that we are all different, we have different goals, different financial situations and therefore there is no standard one plan fits all. However, if you are looking towards property investment there are two basic alternatives. Property funds or direct real estate investment, which is it to be for you?

Benefits of property funds

Perhaps the main benefit of property funds is the fact that you gain exposure to an array of different real estate investments, depending upon the size of the fund, which you would not be able to obtain if investing directly yourself. On the plus side, an investment in an array of different properties does reduce the risk factor associated with buying one property, although it can reduce your overall returns in the long-term. It is basically a risk/reward ratio situation.

Quote from PropertyForum.com : “While the troubled euro has prompted an array of European real estate markets to falter, many people believe that the Greece debacle was an accident waiting to happen.”

It is also worth noting that if you do go down the property funds route, many of which are quoted on the stock market, you are also putting your faith in the underlying investment managers. While they have an array of data and contacts which the “person on the street” could only dream of, they do not always get it right. Then again, if the experts call it wrong what chance do individuals have?

Direct real estate investment

If you’re able to read local and international real estate markets, you have the experience and skill to close a deal then there is every chance that you can make significant money by going it alone. This is not a situation any financial advisor would recommend for an individual because to all intents and purposes, assuming you are investing for investment purposes rather than buying a property to live in, you are putting all of your eggs in one basket. You might pick the right time, the right market, the right type of property but if something was to happen out of your control, your investment could be in serious trouble.

While it would be wrong to suggest that direct real estate investment cannot be extremely lucrative we need to weigh up the risk/reward ratio. Do you have the skills to identify undervalued property, manage currency situations and monitor your properties on an ongoing basis? These are questions that we should all ask ourselves if looking at individual real estate investment.

Conclusion

Any long-term investment portfolio should include some kind of exposure, whether directly or indirectly, to the real estate/property market. This is a standard portfolio for a standard investor and something which the majority of financial advisers will recommend. However, before taking a final decision on your particular situation it is imperative that you take professional financial advice because, no matter what the cost, good advice can pay for itself time and time again. Do not rush in, do not assume that international markets are like for like with your home market and take as much advice as is available, then decide.