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What Is an Indirect Investment?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 28 October 2014
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An indirect investment is a type of investing opportunity that does not require the actual purchase of the asset that ultimately generates the return. This type of arrangement is often associated with investing in real estate ventures, typically by purchasing stocks issued by a real estate company that in turn purchases and maintains the properties generating the dividends issued to the shareholders. There are a number of benefits to indirect investment, including the ability to avoid having to be directly involved in the management and upkeep of the assets involved.

One of the easiest ways to understand how an indirect investment in real estate works is to consider the situation of a novice investor who would like to generate some profits from investments in real estate, but has no desire to actually own the properties involved. In this scenario, the investor would buy shares of stock in a company that owns and manages real estate holdings. As the company generates profits from those holdings, that in turn means that the value of the shares increases and the investor earns dividends from the holdings. At the same time, the investor does not have the responsibility of developing or maintaining those properties in order to generate some sort of return.

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Using this type of indirect investment approach can be especially helpful when the investor wishes to allocate at least a portion of his or her portfolio to international or foreign indirect investment development. Since the investor assumes no responsibility for directly managing the real estate properties involved, it is a relatively easy task to identify opportunities associated with specific geographical locations and work through a third party to invest in those opportunities. Assuming the investment is sound, the investor can enjoy returns without devoting any other resources to the venture, making it easier to focus on other money-making opportunities closer to home.

As with any type of investing, choosing to go with an indirect investment requires qualifying the potential for that investment in advance. This means taking the time to assess the history of that opportunity, understand how it is performing in the current market, and the potential for growth in the future given what can be reasonably assumed will happen within the marketplace in both the short and the long term. Doing so makes it possible to understand if the projected returns are acceptable in comparison to the risk involved, or if the investor should look for a different opportunity that shows more promise.

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