1) Exploring Real Estate as a Portfolio Diversification Asset

January 5, 2022 admin No Comments

1) Exploring Real Estate as a Portfolio Diversification Asset

Due to the volatile nature of most investment markets, it is natural for all asset classes to experience changes with time. It is important for investors to diversify their portfolios by increasing the number of assets to enhance portfolio success and generate high returns.  

Investing in single stock and asset classes often comes with the risk of the stock failing with the movement of the market. The COVID -19 pandemic was a great example of this risk. Industry segments, including entertainment and tourism, suffered heavily as a result of the pandemic. This landscape makes it essential for investors to diversify their portfolios and invest across a wide range of asset classes.  

What Makes Real Estate the Ideal Portfolio Diversification Asset Class 

The real estate market has showcased consistent returns over the past decades with no correlation to public markets. Let’s explore the key elements of the real estate market and why it’s a great area to diversify your investment portfolio. 

Low Correlation to Conventional Assets  

Unlike other assets that are publicly traded in stock markets, real estate investments are made privately. Investments such as bonds, stocks, currencies, and other commodities are traded on public exchanges and have wider public involvement and disclosures. This leads to a correlation in the performance of the asset classes because they share the same market dynamics and weaknesses.

On the contrary, the private investment market has different investing dynamics compared to public markets with less volatility. Real estate has become the optimal investing class for individual investors to explore value in the market and enhance returns.  

Minimizing Risk  

The previous years witnessed record-breaking price increases in real estate across the United States. This monumental growth provided investors with insights into the growth potential of the industry with the ability to generate cash returns and long-term appreciation. Other real estate segments, including commercial real estate investments, provide investors with active opportunities to minimize their risk and generate high returns over the long term.  

Public market asset classes such as stocks and bonds are also widely impacted by governmental and regulatory policy decisions through interest rate increases and other regulatory changes. These changes can result in a domino effect in the entire industry segment with the market shrinking and external control becoming a risk factor. Shifting to a private market segment with real estate allows investors to separate their portfolios from conventional markets and add a mitigating factor.  

Passive Investment  

Most conventional investments such as trading stocks or commodities require you to be actively involved in the trading process. The nature of these investments increases risk and volatility for the assets being traded. Real estate, on the other hand, is the ideal passive investment to generate consistent returns without requiring active intervention and involvement. The generated income from real estate can be reliably achieved without acting management strategies needed to sustain returns.  

Duo-fold Returns  

Unlike other asset classes that primarily generate appreciative returns, real estate provides you with the ability to generate dual returns in the form of passive income and appreciative value. This allows investors to tap into higher returns than other comparable classes as they’re able to tap into liquidity and appreciative value at the right time. The potential for passive investment in the real estate sector enhances cash flow generation for investors that are looking for consistent short-term returns along with the appreciation increase in pricing.  

Liquidity Options  

Public markets are preferred by investors due to their high level of liquidity. Stocks and bonds can be easily liquidated on a daily basis. This increases the level of accessibility for investors that are looking for high liquidity.  

However, this liquidity often leads to a cost-related impact for investors in the public market in the form of built-in costs that are factored into public-market investments. For long-term investors that are relying more on holding their positions, this can be a negative factor as the difference can be noticeable over a long period of time.  

Private market real estate is generally illiquid with maximum returns generated through appreciation. The lack of liquidity in the real estate market is rewarded by increased returns, which are factored into the nature of the market.   

Expansive Options in the Real Estate Industry  

The real estate industry offers a wide range of investment options for potential investors that are looking to diversify their portfolios. Across the commercial and residential real estate segments, a wide array of products can be selected based on the investor’s preferred real estate direction.  

Here are some of the best options in the industry.  

  • Residential Real Estate – Single family homes and apartments are becoming an increasingly popular investment choice based on their appreciative value. With record-breaking home sale values observed in 2021, investors are rapidly exploring residential real estate as a way to diversify their portfolios and benefit from the aggressive growth witnessed in the industry.  
  • Commercial Real Estate – Commercial real estate can be a great investment vehicle in the form of crowdfunding and syndicate investment for individual investors. The development of offices, apartment complexes, and larger projects can offer long-term cash flow and risk mitigation for investors that are looking for stable cash flow and long-term appreciation. Commercial real estate possibilities allow investors to diversify their portfolios and capitalize on regional growth opportunities.  

Conclusion 

The uniqueness of the real estate market vs the public markets make it a great option for diversification as it allows investors to benefit from consistent returns along with a proven history of long-term appreciation. The potential for regular income throughout market downturns also makes it a viable option for investors that are looking to mitigate risks in their existing portfolios.  

It can be a great decision for investors to explore real estate as a diversification tool to enhance their risk-adjusted returns and generate high returns.  

Have questions about real estate investments?  

Connect with our qualified experts to get insight on diversifying your real estate portfolio. 

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