So you’ve designed an income portfolio containing a healthy mix of equity and debt instruments tailored to your personal situation and taking into account the current economic climate. Congratulations!
But wait – something is still bothering you.
After some thought you realize that all of the investments in your portfolio depend on the performance of the financial markets. Based on recent past experience you recall how these markets were actually quite correlated in their response to the financial shocks that hit a few years ago. Isn’t there a way to diversify a bit more and invest in income producing assets that are not so dependent on the financial markets? The answer is a resounding………maybe.
On the face of it, the price of real tangible assets like real estate and commodities would appear to be uncorrelated with stock valuations or interest rate fluctuations. However, common inter-market forces (e.g., significant changes to the value of the dollar), can affect both financial markets and the price of real assets at the same time. Assuming you find this bit of correlation acceptable, then real estate does present some possible income investments to explore.
Of course the most common real estate investment is to buy residential rental property (preferably at a deep discount) and generate income from the rent. The internet is full of resources to assist you in finding suitable properties. Here I want to mention some other types of real estate investments for income.
Agricultural properties include farms that generate income. You can own and operate the farm for income yourself, or you can purchase property and just lease it to a farmer for the rental income. Good basic information on agricultural investments can be found here and here.
Forestry assets include timberland that provides raw materials for paper products, construction, and fuel. The primary driver for forestry investments is the fact that timber grows in physical size, giving owners exposure to financial growth that is independent of financial markets. In addition to income from timber sales, forest owners can derive additional income from hunting leases. Helpful information to jump start your research for these investments is located in Chapter 2 of this Forest Landowners’ Guide. Forestry assets tend to be longer-term investments, but once established, the income is fairly secure.
Selective investing in rural land might also have potential income possibilities although much research is needed to make this kind of investment pan out. The most common way in the U.S. to derive income from raw land is to own property with a high probability of oil or natural gas reserves underneath, and to then lease the land to drillers. Another way to generate income is to buy rural land that has commercial potential (location, location, location!) and lease it. The website LandsofAmerica.com is a good resource for finding land properties.
Like every other investment class, these all come with their own sets of risks and rewards, so research is absolutely required, but a careful investor can be successful in diversifying an income portfolio by adding alternative real estate investments for income.