Three reasons real estate investments can be less volatile than the stock market

Volatility is something every investor will face, but real estate investments can help protect your overall portfolio from volatility’s effects.

In the early days of the pandemic, the Dow Jones Industrial Average lost 37% of its value in a little over a month. But in subsequent months, the stock market rebounded almost as quickly as it fell. This is volatility at its best, or worst, depending on your portfolio.

In contrast with the stock market, real estate can generally be much less volatile for three key reasons:

Longer-Term Holds

We all know the adage “buy low, sell high.” But when there’s an economic downturn, nervous investors might choose to sell on the downswing in an attempt to protect a greater portion of their potential earnings. After all, it’s better to lose $1.00 a share than $10.00, right? But this rush to sell, which is incredibly easy thanks to e-trading platforms, can cause an even more significant price drop, which in turn can lead to more panic selling. 

Real estate investments, on the other hand, work in years, not days or weeks (or even quarters). Generally, real estate projects target a hold period of at least two years, some target as many as ten. This means your real estate investment can ride out any current market volatility and sell when the market is more stable and the project is able to command a favorable sales price. Since your investment in private equity real estate is illiquid, meaning you can’t sell whenever you want, it can help ensure you don’t fall victim to the panic selling mentality. 

Real Estate Is Local

While there are always exceptions to the rule when the public markets are volatile almost every company takes a hit. Real estate values, on the other hand, are often more impacted by local market drivers. Apartment rents rise in metros that people are moving to. Ski resort reservations explode in the winter but often vanish in the summer. Industrial properties in port cities are bustling around-the-clock. It’s not to say that what’s happening on the national level won’t impact real estate values, the local situation is often more relevant. 

Real Assets, Real Values

Real estate investors can earn income in two forms: ongoing cash flow generated by income, or from a share of the property’s final sale price. Property values rise and fall during market cycles, but they tend to appreciate over time. More conservative business plans might assume less appreciation in the end, but anticipate more steady cash flow, while more opportunistic projects are hoping for significant appreciation over the hold period. For instance, an apartment building that is worth $28 million in year one might sell for $45 million in year six thanks to significant property improvements that ultimately increased the value of the building. Overall, commercial real estate prices increased by 24% in 2021 with significant price appreciation in most asset classes.

Volatility is something every investor will face, but real estate investments can be a valuable addition to your investment strategy and can help protect your overall portfolio from volatility’s effects. 

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