Forget The Bubble Buzz

Financial planners are saying that both advisors and their boomer clients need to minimize the buzz over bubbles and rising building costs and heed one clear message: Real estate is a core part of a portfolio.

These planners say that investing in real estate investment trusts, REIT mutual funds or in real estate itself affords a boomer with capital appreciation, regular income or both.

For boomers, the buzz includes national attention to a possible real estate bubble and concerns over how rising construction costs may impact real estate development.

Sparked by the rising cost of materials, the construction industry may be curbing some commercial building. For instance, Prudential Real Estate Investors recently postponed development of a business park in Deerfield Beach, Fla., because of rising construction costs, Theresa Miller, a Prudential spokesperson confirms.

“The fundamental question is whether REITs and more broadly real estate is appropriate for boomers. The answer is ‘yes,’” says Kevin Gahagan, a certified financial planner, principal and senior advisor with Mosaic Financial Partners, San Francisco.

For most investors, he says, REITs and real estate mutual funds are the most efficient way to invest in real estate. Even using leverage, it takes a substantial sum of money to invest in real estate. Historically, a significant portion of return is from cash flow from rents and leases, and entry-level real estate usually does not have consistent streams of cash flow.

The problem, Gahagan explains, is that people entering the market bid up the price of entry-level properties while investors in office buildings and other commercial properties more accurately estimate the return needed to make a profit.

Gahagan says that in addition to having professionals who can assess needed returns, REITs or REIT mutual funds also offer both geographic and sector diversification. So, if factors such as an increase in building costs slow building in geographic regions where economic growth is not perceived to be as strong, diversification will outweigh that slowing, he explains.

He also notes that although costs of materials may have a short-term impact, it is important not to factor those increases too far out into the future.

His firm recommends both REITs and REIT mutual funds, but he says REITs are usually recommended if a client has $50,000 to $60,000 to invest in that investment type and has a portfolio of approximately $1 million. Otherwise, trading and transaction costs make mutual funds more cost effective, he notes.