According to reports, the U.S. real estate market was estimated at around $49.3 trillion in 2018. Where the residential market and commercial market contributed $33.3 trillion and $16 trillion respectively. While the total equity capitalization in the U.S. stock market stood at $30.4 trillion.
There are pros and cons of investing in both the private and public sectors, but the low correlation and volatility give real estate an edge over the stock market. This makes real estate a popular choice amongst investors.
Let us shed some light on the reasons that make real estate less volatile than the stock market
1. You (or the REIT) is the One in Charge
Investing in real estate gives access to a tangible asset, providing complete control over your investment. Whereas buying shares of an index fund means owning stocks in multiple companies.
Real estate properties can be renovated, reconstructed, or repaired to increase their potential value. This flexibility results in better performance of an investment property in the market.
The risk of putting your own money to invest can also be minimized as real estate offers multiple financing options. Investors can finance their real estate purchases by applying for a loan. You can then cover the loan amount and repairs cost by selling the property at a profitable price.
There are mainly two loan options for investing in real estate, conventional loans, and private hard money loans. You can opt for the option that best suits your financial requirements and start investing.
2. Can be Less Risky than Stocks
If you are looking to mitigate risk and diversify your investment portfolio, investing in real estate can make you achieve both. You can invest in single or multi-family homes, rental properties, and commercial properties like shopping complexes or office spaces to diversify your investment portfolio in a less volatile asset class than the stock market.
You should try to diversify your investment portfolio across uncorrelated assets in order to minimize your risk. So, the underperformance of one of your investments won’t affect the other investments because of the low correlation. That will only make it easier for you to bear the possible losses.
Though the higher transaction costs, high level of inefficiency, less information available publicly, and illiquid assets may seem unfavorable but are the biggest reasons there is less correlation and volatility in the real estate market.
Real estate investment allows diversifying your portfolio while hedging your risk against the stock market. This makes real estate a potentially safer investment option than the highly volatile stock market.
3. Natural Hedge for Inflation
The value of every investment class may rise in response to inflation, but that’s not necessarily true with real estate. Due to their limited supply, hard assets hold an intrinsic value which makes real estate a natural hedge against inflation. The value of ‘hard assets’ like real estate remains unchanged or above the inflation rate. This allows real estate to hedge inflation more efficiently compared to the stock market.
Just as the land, when real estate becomes scarcer and the demand for it rises, its value appreciates. You can make the most of this ‘value’ built by the scarcity of real estate through capital gain and increased (rental) income, as both will elevate with the growing demand.
Real estate is less susceptible to price swings. Because of the less correlation between real estate and the stock market, the possibility of real estate values responding to daily price movements of the stock market is minuscule.
4. Above-Market Returns
The real estate market allows buyers and sellers to negotiate the price of the asset. Because there are lower trade volumes and the information of an asset may not be available equally for everyone, you have the chance to gain above-market returns.
By using your knowledge and experience efficiently, an entity can negotiate the purchase price of an asset and sell it for an above-market price to earn more returns on your investment. Something an investor is unable to do in the stock market.
It doesn’t matter the degree of knowledge, experience, or the number of resources you have than other stockholders, you can never earn above-market returns by investing in the stock market. You are only entitled to buy or sell your investment at a price set by the market when you feel it’s worth it.
5. Consistent Passive Income
You can invest in buy-to-let properties to start earning a regular income and maintain a steady cash flow by renting the property to tenants. As of April 2021, American tenants are paying an average monthly rent of $1,736.
Holding a rental property allows you to build significant equity, over the long run. You can use the equity built on the house to refinance your existing loan to purchase or invest in another rental property. You don’t have to put in any kind of down payment to refinance a loan, as you have already done on the previous one.
In this way, you can pay off the existing loan by taking another loan and use the remaining amount to pay the down payment of another investment property. As you hold the investment for a longer-term its value will appreciate and with a 3% inflation rate, you are getting a great deal here.
Moreover, investing in REITs (Real Estate Investment Trusts) can be a great way to start a passive income without having to buy or manage a property. The income you receive comes from the revenue generated by commercial properties in the REITs through rent or lease payments.
These payments are in the form of dividends and most of the REITs distribute quarterly dividends to the investors. REITs have strict guidelines on dividends, which make them pass on 90% of their taxable income to investors. The 90% rule was primarily made for investors seeking passive income from a diversified real estate portfolio.
6. Tax Advantages
A great thing about investing in real estate is the tax advantages you can take. This financial perk can allow you to deduct expenses related to the management, operations, and maintenance, such as:
1- Property Taxes
2- Property Insurance
3- Mortgage Interest
4- Property Management Fees
5- Cost of Maintenance and Repairs
There are income limits to avail these tax benefits so make sure you comply with the IRS regulations.
If you are seeking investment opportunities in REITs then you can avail a set of tax advantages. One of them is the pass-through deduction, which allows you to deduct up to 20% of your dividends.
Another way is to take advantage of the capital gains by the sale of your property, for a profit. There are two types of capital gains you can avail, short-term and long-term.
A short-term capital gain is realized when you sell the property for profit within the first year of owning it. Whereas, the long-term capital gain is realized if you own a property for a year or more and then sell it for profit.
Real estate is a hard asset that provides multiple investment options without the risk of volatility.
Investing in real estate comes with the pride of owning a property and is considered a status symbol. It is a tangible asset that you can see, feel, and make changes to, unlike stocks that are just a piece of paper.
There is less risk involved in real estate as compared to stocks. You don’t have to worry about the ups and downs of the stock market to reflect on real estate, as both investments have less correlation.
Inflation may impact the value of other investments, but real estate is immune to that. Because of the intrinsic value, it holds that helps outpace the inflation rate, keeping its value intact.
Investing in rental properties allows you to earn a monthly income. You can further use the equity built on it to refinance your existing loan.
Abhi Golhar is a nationally syndicated media host, entrepreneur, and sought-after speaker with a large national following and wealth of resources to share in the Real Estate investment industry.
He has built and manages a sizable, profitable investment portfolio across the Southeast US, with expertise in benchmark markets.