We all know that investing for income should form at least part of a diversified investment strategy. The opportunity to compound returns by reinvesting income offers a unique opportunity to amplify returns, almost exponentially, whilst adding meaningful risk reduction through organic portfolio growth. But record low interest rates set by increasingly desperate central banks, and equity market volatility at record highs, investors are seeking out alternative investments capable of delivering superior yields than cash deposits, whilst not dramatically altering the overall risk profile of their portfolios. Indeed, adding non-correlated assets to a portfolio and effectively reducing exposure to financial markets is a strategy employed to an increasingly greater degree amongst institutional investors such as pension funds and university endowments.
But where should we look for income outside of stocks, bonds and cash? Here is an introduction to the most widely held income investment that might outperform financial assets.
The most common form of alternative investment, real estate generates income through rentals, or in the case of niche real estate like farmland or timberlands, from the production and sale of commodities such as wheat or timber. Whilst the value of stocks and shares can fall to nothing overnight, property will always have a tangible value, and whilst prices do sometimes fall, well-located and good quality property assets always appreciate given enough time and proper management.
So real estate of varying types makes for an interesting alternative to financial assets, however Investors considering real estate investments should also take into account the risks; properties can fall in values, on-going costs and expenses can be high and sudden, vacant period with no tenant means no income, often there is a cost of financing to cover before any income profit, and property by its very nature can often be quite illiquid, offering owners no access to their capital in an emergency.
On the up side, property assets in some markets can be found to generate annual yields of up to 25 per cent, which means the risks, when acknowledged and managed, may be worth taking in order to capture that kind of income, but again, only invest what you can afford to keep locked away, and be prepared for unexpected costs.
Proper research and due diligence is the key to success in using property assets as investments for income. Research to find areas with the most potential, and if possible the opportunities to acquire good quality properties at a discount from distressed sellers. Due diligence in order to properly understand the risks associated not just with the specific property being acquired, but with property ownership in general, including tax liabilities and potential future ownership issues.
When approached with sufficient focus and common sense, property investing presents many investors with an opportunity to benefit from the inherent advantages of owning an investment assets the generates income to be reinvested in further assets that may also in turn generate more income.