The intent behind this series of posts is to give you an idea about “alternative investments”. What they are, how they have performed over the last several years, and whether or not you should begin to employ them in your personal investment portfolios. I think you should, and by the end of this discussion, you will have found at least two ways to integrate them into your thinking. The idea is to help you make money with your investments, and along the way, perhaps employ my firm to help you get where you want to go.

Today’s post involves Real Estate as an “alternative investment”. There are many people who have made huge sums of money in real estate. If you have a long time horizon, the rewards are typically higher than most other areas in which you can make money. But done traditionally, the downside can be a lack of liquidity. That phrase, since I’m mindful that some of you are new to this, is that you can’t easily turn a real estate asset into cash.

So from time to time, there are no options but to hang on, and hope for the best. My mother-in-law, bless her heart, had a real estate license, and lived to own property. She did very well with it. But then she passed away, shortly before the start of the current financial crisis, and her family, my wife and her brothers and sisters, are stuck with what today are good real estate properties that cannot be sold without accepting a huge loss in value, compared with what they were worth in 2006.

The reason real estate can be such a fantastic investment is the opportunity to use leverage. Another term that may need defining. Leverage translates to the ability to use other peoples’ money to own property. If a piece of property is worth $100,000, but I have only $10,000, I can purchase that property with my $10,000 and borrow the remaining $90,000. If I hold on and the property, given there is finite amount of it in a world of increasing demand, increased in value to $150,000, my net worth has increased by $50,000 when all I invested was $10,000. Yes, I had to pay interest on the $90,000 but I rented the property and the rental payments effectively paid the interest, leaving me with having turned $10,000 into $60,000 over the course of several years.

You can do this with stocks and bonds, but it’s a trickier process. The downside is when the value of any investment goes down, as it has recently, and you are stuck with something worth less than you started with. Not a good thing.

The focal point of this post is an article that appeared recently in Financial Advisor Magazine. It reflects a presentation by Nick Murray who has long been a favorite writer of mine. Many years ago I put an article by him on my web site, giving him full credit. But after a few months someone from his office called and told me to take it down. Rather than create a problem for myself I took it down. But this link to his article is, I hope, in the public domain, so here it is: Real Estate For The Right Reasons. It’s not a short read, so I hope you get to the end.