Smart investors continually strive to capture the most attractive risk-adjusted returns, especially in the face of volatile markets and changing conditions. When it comes to meeting this objective, real estate has historically played an important role in a diversified investment portfolio for individual investors. Private real estate has generated higher annual returns over the past 20 years than both US stocks and bonds, yet it has experienced significantly less volatility than stocks.
Recent stock market volatility has been fueled by Reddit-obsessed retail investors trying to squeeze heavily shorted publicly traded stocks. The ability of these retail investor platforms such as Robinhood to manipulate stock prices has spread to other countries and shows no signs of slowing down. Regulations are certain to follow. In the meantime, hopefully investors will stick to the basics of investing: diversify, avoid leverage, and only invest in markets and instruments with which you are familiar.
The coronavirus pandemic has dramatically changed the investment landscape. For investors who have experienced the recent stock market volatility, private real estate ownership can provide a welcome port in a storm. In addition to greater stability, private real estate frequently affords owners higher cash yields than public markets, which is an advantage to investors seeking passive income. This is because real estate, as a capital-intensive asset class, is usually purchased with a portion of debt financing. As the operating income from a property increases (using fixed-rate debt leverage), the cash-on-cash return to investors tends to increase over time.
Beyond greater stability in pricing and higher cash yields, one of the unique benefits of private real estate ownership are the tax benefits which are unavailable in the public markets. Owners in private real estate can capture value from depreciation, refinancing, and through 1031 exchanges. Collectively, these benefits can make private real estate ownership an attractive option compared to the public market alternative.
According to J.P. Morgan, historically real estate also provides a foundation for low correlation to equity performance and a strategic opportunity for portfolio diversification. A recent study comparing the performance of private real estate to a 60/40 US stock and bond portfolio over the 20 worst quarters since 1990 found that in 17 of those 20 quarters, private real estate investment returns were positive while the portfolio of stocks and bonds was down.
