Right now happens to be a good time for many people in the stock market. Led by technology stocks, people are experiencing growth and feeling good from their exposure to the stock market highs. The Game Stop short squeeze left one average part-time individual investor up by millions of dollars!
With all the success of the stock market, why would anyone doing well today consider investing in real estate? Below are a few important reasons to consider.
Diversify Your Wealth
You have likely heard teachings about the importance of diversification and why it is good to have a balanced wealth portfolio. Ironically, the much of the advice to diversify considers investments into five or more stocks/funds diversification. I do not since they are all in the same asset class.
True diversification happens across asset classes: stocks, real estate, precious metals, exposure to businesses, etc.
If thee majority of your wealth building is pegged on the stock market, there is much risk in your portfolio. I have invested in stocks for years and plan to continue to do so, however, with only a portion of my wealth. Especially given the inflated nature of the stock market, it is important to diversify.
Real Estate Advantages
Real Estate has certain advantages that cannot be matched by other asset classes. I outlined them in an early blog post about why everyone should invest in real estate. Below are a few lines from that post:
Many middle-class Americans focus on stocks as their primary investment asset class. And while many have generated large increases from exposure to these growing stock values over the years of economic expansion, there is little control of these assets and cash flow during the holding periods (even dividend paying stocks do not produce dividends that will allow you to quit your job)...
….But what if there was an investment class that allows owners to leverage more value than they initially invest to control the asset, provide the ability to add value and equity during ownership, pay you for owning it while it appreciates in value, all at the same time? Never in a million years…actually, yes it exists. Real estate.
To summarize the advantages that real estate offers, investors are controlling a real asset (something that physically and irrefutably exists) that produces income due to the need for housing, grows in value through operations and thereby increases equity of all involved.
Similarities of Stocks and Real Estate
In spite of the differences, there are some very real similarities between investing in stocks and in real estate. Here are a few:
- Passive Nature: depending on the type of stock and real estate investing, both asset classes allow for investors to invest passively. Many may not know about the passive investing opportunities in real estate, such as through syndications, but perhaps this route is appealing and fitting for someone with goals of diversification while still being able to invest passively.
- Value determined by underlying asset: In stocks, valuation is ultimately determined by the underlying asset, that is, the company and the profitability of its operations. Of course, there are other variables that enter the mix such as investment sentiment and the volatility that it causes in stock prices. Ultimately, however, the long term value should be based on true fundamentals of the underlying company asset. In real estate, this is the same. Valuation of multi-family real estate is determined by the profitability of its operations (rental income, operating expenses, etc.). Similar to stocks, multi-family real estate investors invest based upon current valuation, cash flow and potential future valuation.
- Both hedge against the dollar: Especially now, with the Fed having released trillions into the economy in order to keep money flowing and avoid disaster, investors have put big dollars into the stock market. The same applies to real estate. Both real estate and stocks are inflated with capital because investors are less bullish on the dollar and seek to invest to beat inflation. This should be everyone’s goal. No one wants their hard earned money to be worth less over time by simply having sat in their bank account over time.
Take off the Blinders
I know that this is not the case for all, but many choose to invest only in stocks and not real estate because of the seeming simplicity of stocks versus real estate. Having first understood the importance of diversification and advantages of real estate, I encourage you to become educated and seek ways that best work for you to gain exposure to real estate as part of your wealth-building strategy.
