How real estate adds stability to an investment portfolio through cash flow and steady price appreciation.
One lesson that many investors learned the hard way through the pandemic is that equity markets are susceptible to volatility at the first sign of economic trouble. In the early days of the pandemic, between February 12 and March 23, 2020, the Dow Jones Industrial Average lost a whopping 37% of its value, leaving many investors to watch helplessly as their retirement savings dropped by over 30% in a matter of weeks.
In the months following the crash, the stock market rebounded almost as quickly as it fell, with markets now sitting at all time high levels. This has been equally concerning for some investors, many of which fear that prices have gotten out of touch with reality and that the significant growth is being driven largely by fear-of-missing-out (FOMO) and hype.
The stock market isn’t the only investment category that’s seen wild price swings due to emotional investing – other alternative investments, such as cryptocurrency and “meme stocks”, have seen even more pronounced price fluctuations. Bitcoin, for instance, is down more than 40% from its all-time high at the time of this writing. There’s even a new ETF dedicated to buying hyped-up stocks for investors eager to strike gold – the ticker symbol is appropriately named “FOMO”.
In any case, it’s become clear that the stock market has resembled a casino, at times, rather than a stable investment vehicle. While there’s nothing wrong with allocating a small portion of one’s investment portfolio into speculative assets, there are far better ways to ensure long-term growth and protection of wealth. Dollar-cost averaging into index funds is one way to achieve this, but this strategy typically limits annual investment returns to around 10% on average.
Real estate volatility
In contrast with the stock market, real estate has proven to be considerably less volatile over time, with little correlation to the performance of the stock market. There are several reasons for this, some of which include:
- Low Liquidity: When there’s an economic downturn, equity investors tend to panic sell their holdings, which is easy to do with the click of a button. This often causes a significant price drop which then drives even more panic selling. Real estate, on the other hand, takes significant time and effort to buy and sell. While there are negatives associated with this fact, the lack of liquidity provides overall stability in the market.
- Stable Demand: The need for multifamily units isn’t going anywhere. Individuals and families will always need a place to call home and there is only so much desirable land available, especially near urban centers. As long as the population and economy continue to grow, demand for desirable real estate will remain strong.
- Siloed Markets: While there are periods where real estate follows a global or national trend, such as the strong growth that’s currently being experienced across the board post-pandemic, local real estate markets tend act somewhat independently of each other. This is in sharp contrast to equities which tend to follow a similar trajectory. A real estate investor can limit their exposure to volatility and risk by investing in markets that have seen strong growth over an extended period of time.
Where volatility is headed
As noted by Fundrise, volatility in the stock market has been increasing for years, even pre-pandemic: “Along with correlation (in the stock market), volatility has also risen. Between 1950 and 1999, there were 81 daily movements of 3% or more in the S&P 500. Between 2000 and 2018, there were 120 daily movements of 3% or more. That’s a difference of 1.6 movements annually on average between 1950 and 1999 and 6.3 movements annually on average between 2000 and 2018.”
In 2020, there were 29 daily movements of 3% or more – more than a third of the number of 3% price fluctuations that occurred during the 50 year period between 1950 and 1999.
Multifamily real estate is poised to continue to remain stable for the foreseeable future. One reason for this is generational shifts which will continue to create a strong demand for rental properties. Millennials are increasingly choosing to rent for longer periods of time to give themselves more flexibility and mobility, a lower barrier to entry (i.e., no need for a down payment), and the ability to live in an urban area. In fact, more and more millennials are reporting that they plan to rent permanently in lieu of buying a home.
Meanwhile, the housing market is the hottest it’s been in years, with a median price growth of 18.7% between April 2020 and April 2021 alone. This significant price growth has been driven by limited housing supply, higher construction costs which have restricted new builds, low interest rates, large amounts of accumulated savings for high earners, and a slew of other economic factors. Housing price growth is forecasted to continue for years while supply catches up with demand, which will continue to drive millennials to multifamily rentals.
Building stability into your portfolio
There are a few different ways to gain exposure to the stability that multifamily real estate has to offer. One popular option is investing in real estate investment trusts (REITs), which are essentially index funds that include a large number of properties lumped into a single fund. The downside to this is that you, as the investor, still have little control over the price of that REIT. Similar to stocks, you’re trusting others to make prudent investment decisions and find value-add opportunities to increase the profitability of the investments. This generally means accepting average investment returns, similar to what could be expected in index funds that track the S&P 500.
For the enterprising investor looking to realize investment gains that outpace REITs and index funds, a more hands-on approach is required. This approach requires either buying an existing multifamily property, identifying value-add opportunities that will increase the cashflow, then hiring a property management company to rent it out; or, developing a new multifamily property in an area with a strong basis for future growth.
In both cases, it is crucial for this enterprising investor to work with a knowledgeable real estate developer who understands how to optimize a property for cash flow through creative thinking and in-depth market knowledge.
Our residents, colleagues and partners are at the heart of all we do. When you invest with us at TCU Development Corporation, you’re not only investing alongside us, but you’re investing in our incredible team, who work tirelessly to deliver results. Whether you’re a first-time investor or seasoned real estate expert, we’re here to maximize your portfolio, while making a positive contribution to the community. Contact us to learn more.