Why Invest in Real Estate


In this installment of the EQUITYMULTIPLE learning series we are going to step back and take a look at a fundamental question: why should investors buy real estate assets. If you are reading this article, you probably have substantial knowledge of equity investing already. This article addresses the specific reasons to invest in private real estate investments in addition to stocks, bonds, and other traditional assets.

The most significant benefit to holding a large portion of your cross-asset portfolio is the diversification to your capital markets holdings it can bring. Diversification is extremely important in order to reduce variance in your optimal portfolio, reduce your exposure to systemic risk, and boost risk-adjusted portfolio returns.

Throughout their investing history, high-net-worth individuals and institutional investors have typically held larger allocations of CRE assets in their portfolios than stand-alone investors. For example, the Yale Endowment, led by well-respected CIO David Swensen, has allocated near or above 20% of the total Yale portfolio to real estate, while individual investors average less than 3%.[1]

This signifies a larger demand for illiquid assets among institutional investors like the Yale endowment, but there are many reasons that commercial real estate in particular is consistently favored by large, experienced investors:

  • Consistent cash flow to investors: Many CRE deals provide regular cash flow in the form of rental income, as opposed to many capital markets instruments, which typically do not generate steady cash-flow, or do so at lower rates.
  • Strong Historical Returns: Over the past 15 years, real estate returns have consistently out-performed capital markets returns and had lower volatility over that same period of time.
  • Low Correlation with Public Markets: As apposed to some public REITS that have significant correlation with capital markets, private real estate investments have a low correlation with debt and equity markets, which further adds to the diversification benefits in portfolios discussed above.
  • Downside protection: The necessity of real estate - specifically multifamily properties - provides portfolios with downside protection in economic downturns. People always need a place to live no matter what else they can afford.
  • Tangibility & Intrinsic Value: By definition, real estate and real assets should always have a growing inherent value due to the growing population and finite amount of developable land in the world.
  • Tax Benefits: In real estate, depreciation of the long-term asset can help mitigate the tax burden on income from rental properties.

This is an exciting time for investors looking to diversify their portfolios by gaining more exposure to private real estate investments: platforms like EQUITYMULTIPLE allow individuals to co-invest alongside institutional real estate investors for as little as $5k (and less in the case of some platforms). While it’s worth doing your own diligence on specific investments and investment platforms, the new landscape of online passive real estate investing allows you to enjoy the same benefits large institutions and other entities have long realized from real estate investing, while committing relatively-small volumes of capital and avoiding the headaches of direct real estate ownership.

[1] https://www.bloomberg.com/news/articles/2015-10-06...

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer



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