Last post we discussed a article that compared real estate to the stock market. We also reviewed how the authors compared apples to orangutans. We looked at the concept of cash flow and leverage. Most importantly, in the end, we noted that real estate is an excellent investment tool. Part 2 will address why real estate is a fantastic tool.
“Real estate … does offer the ability to leverage, provide cash flow, etc.”Real estate is fantastic because it does offer the ability to leverage, provide cash flow, etc. While those two items can also cause headaches, I would argue that one of the best parts of real estate is … its … illiquidity.
John Maynard Keynes once noted, “The spectacle of modern investment markets has sometimes moved me towards the conclusion that to make the purchase of an investment permanent and indissoluble, like marriage…might be a useful remedy of our contemporary evils. For this would force the investor to direct his mind to the long term prospects and to those only.” (Keynes, 1936)
“… real estate market has its own problems and benefits.”Real estate’s illiquidity provides individuals the impetus to hold on through down periods. Many of the families with large real estate holdings don’t even pay much attention to the value of the real estate. Certainly they know when real estate drops in value, but most of them are more concerned with the cash flow than the asset value. This brings up an interesting aside. When rents drop they are very concerned. When rent disappears for a protracted period (i.e. no one is renting a unit) they are horrified. Just like the stock market, the real estate market has its own problems and benefits.
Real estate’s illiquidity also means it reacts to economic forces differently than the stock market. This means real estate provides us with diversification. Remember that diversification is related to the way in which we receive returns. We don’t want the value of investments going up and down together. We want them to move independently. Our illiquidity in real estate means we don’t see spikes or deep falls from day to day. Real estate moves on a month to month and year to year basis. The trick is learning how to rebalance you position on an ongoing basis.
“… real estate provides us with diversification.”Real estate should invariably hold a place in everyone’s portfolio. “How big a percentage,” is the question. The only way to come to a conclusion is through proper planning. Find an advisor that is amenable to using a more holistic approach to diversifying your portfolio.
Don’t confine your investment options to stocks, bonds, and mutual funds and don’t play chicken with your nest egg!