Why Real Estate Investing Makes Sense During Uncertain Times
This guest post comes courtesy of Ryan Scribner, founder of Investing Simple—a personal finance and investing blog.
Very few people would say that they enjoy investing during uncertain times. We all tend to enjoy investing when the wind is in our sails. It feels good to purchase a stock or fund and see your money growing almost immediately. Up until 2020, this was exactly what most investors were experiencing. You would toss your money into the market and start seeing returns in a very short period of time, in some cases almost immediately.
However, during uncertain times, it is a much different experience. Earlier this year, there was a lot of uncertainty in the market surrounding the global pandemic. Schools and businesses were shutting down worldwide as the global economy came to a halt. Most people shifted their focus in this time from investing their money to simply having enough money to pay the bills. If you were fortunate enough to be able to invest during this time, it was not a walk in the park.
Investing during uncertain times can be extremely stressful. For one reason, you are going against the prevailing trend. Most people are selling their assets in a mad fury, which is why we saw the stock market crash in 2020. Investing at a time like this is kind of like running into a burning building while everyone else is running out. While there are always once in a lifetime deals to be had investing during a crash, it is not for the faint of heart.
It appears that we are largely out of the woods now with the global pandemic as the vaccine rollout is underway across the country and the globe. However, there is still a large degree of uncertainty out there with the markets. For one thing, record amounts of stimulus money have flooded our economy (with more on the way) effectively propping up the stock market. This makes many investors wary of putting more money into the market. Despite the fact that we have not fully recovered from the economic shutdown, the stock market is back to all-time highs. There seems to be a disconnect between the stock market and the real economy.
My Journey to Real Estate Investing
I have personally been investing in the stock market since I turned 18 years old. I am now 25, so while I have not had decades of experience, I have seen some ups and downs and experienced the stresses associated with that. As far as the stock market goes, my current strategy is investing in blue-chip dividend stocks. I have grown a portfolio to a little over $170,000 over the last few years. This allows me to generate about $5,000 per year of passive income which I reinvest. Beyond the stock investments, I also have a hands-on real estate investment which is the multi-family property I own and live in. Right now, I am following the popular strategy of house hacking. This allows me to minimize my own housing expense by offsetting my mortgage with rental income from my tenants.
But what about an alternative to the stock market? One that is less volatile, and even more durable during uncertain times? Private real estate investments could be the perfect investment for you. Most experts recommend investing anywhere from 10% to 30% of your portfolio in real estate. And no, they are not talking about the single-family home that you live in. They are talking about investing in rental properties.
The problem here is that not everyone wants to be a landlord. I can tell you from firsthand experience that it is not a source of truly passive income. You will get those emergency calls and texts. For example, on Easter Sunday of this year, I got a call from my tenant stating she had no hot water. Turns out, there was a blowout in the basement and it had a few inches of water in it. These are the types of hassles associated with owning rentals, and not everyone wants to invite this stress into their lives.
A better option for many people is investing in real estate via crowdfunding. Rather than buying a rental property outright and managing it yourself, you collectively raise money with thousands of other investors. That money is then invested in a large real estate portfolio, and the company you invest with usually manages the day to day operations for a small fee. This allows you to reap the benefits of real estate investing without the hassle of being a landlord.
Platforms like EQUITYMULTIPLE make it easier than ever before to invest in private real estate deals. On their site, you will find a number of pre-vetted offerings available to accredited investors. Rather than ponying up $50,000+ for a down payment on a rental, the minimum investment is just $10,000. You can invest in funds that hold many different properties, or you can pick and choose individual deals to invest in.
But does it make sense to invest in private real estate during uncertain times? Most experts would say, yes! There are a few reasons behind this. The first is the fact that real estate, especially private deals, tends to be a lot less volatile than the stock market. Individual stocks and even funds can fluctuate in price wildly. If you are not a seasoned investor, this can be a very stressful experience. Since it is so easy to buy and sell stocks on an exchange, people do it all the time.
Real estate, on the other hand, is a much less liquid investment. You can’t buy a piece of real estate on Monday morning and then sell it by the afternoon. For that reason, most real estate investors are focused on a longer-term time horizon. When this is the case, you see less panic selling and less volatility as a result. For most people, it is easier to sleep at night when you don’t have frequent and drastic fluctuations in the value of your portfolio.
I have $25,000 currently invested in private real estate through a crowdfunded real estate platform. During the beginning of this year, my stock portfolio took a nosedive. I ended up losing about 30% of the value of the stocks that I owned across the board. This was a rather stressful experience. My crowdfunded real estate investment, on the other hand, saw no real changes. There were concerns about people not paying rent, but what we found in hindsight is that most people did.
I can say this from firsthand experience, I was a lot more worried about my stock investments compared to my private real estate investment.
Another key reason why investing in real estate during uncertain times makes sense is because there isn’t much correlation between stocks and private real estate. The reason why most experts recommend spreading your money out across stocks, bonds, and real estate is so you don’t have all your eggs in one basket. We are, of course, talking about diversification.
Let’s say the stocks in your portfolio take a nosedive like we saw earlier this year. That does not necessarily mean that housing prices will crash too. In fact, we saw the exact opposite happen in 2020. As a response to the global pandemic, the federal reserve lowered interest rates to near zero. This made it cheaper than ever before to go out and get a 30-year mortgage on a property. Now, we are in a bit of a housing boom with people snatching up real estate left and right. This demand pushes prices higher and higher.
The Bottom Line
This is just one example of how assets like stocks and real estate do not directly correlate. Private real estate should be a part of any well-rounded portfolio, and EQUITYMULTIPLE may be a good fit for you if you are an accredited investor.
At the end of the day, you may find that it is a less stressful investment since it is historically less volatile and not directly correlated with the stock market. I have personally found this to be the case, and I plan on adding more private real estate to my portfolio in the future.
So, in a nutshell, my overall investment plan for 2021 looks like this. First of all, I will probably not be buying any more rental properties. While there are many positive aspects to owning physical real estate, it is not passive. I find the headaches of the day to day management are just not worth it for me, given my busy lifestyle. Second of all, I will be seeking more investments outside of the stock market. Right now, stocks make up more than a third of my overall investment portfolio. I would like to diversify more into alternative investments, such as private real estate deals. Lastly, I will continue making direct angel investments into startups, which I started doing this year. I will still keep a cash cushion on hand too for emergencies, which is something I have done for years.
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