Three Ways to Beat Market Downturns In Real Estate
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Real estate markets, just like the stock market, are subject to constant changes that could cause unfavorable circumstances, especially for investors. However, investors can protect their investments in both the stock and the real estate markets by diversifying their portfolios. Diversifying investments in stocks and real estate help reduce risk or even insulate them from downturns and sudden changes in the market, ensuring a consistent cash flow.
However, not all markets are equally affected by economic downturns. While diversifying investments in stocks could not wholly guarantee a loss, especially when the entire stock market falls, diversifying your investments in real estate could protect investors from loss and assure consistent returns. Stacked explains three ways on how to diversify investments in commercial real estate (CRE) and how doing so could protect you from downturns.
Three ways to diversify passive CRE investments
According to Stacked, investors can place their passive CRE investments in either public or private markets. However, there are different strategies as well as benefits and drawbacks in investing in either market. In addition to this, there are differences in investing in public and private markets, depending on how you can diversify and how these passive CRE investing strategies could protect your investments from negative changes and losses. When you invest in public markets, the principal or main investment options are real estate investment trusts (REITs). In contrast, in private markets, the alternatives are real estate syndications and private equities.
Stacked explains that one of the significant advantages of REITs is they allow investors to purchase as little as one share of individual REIT stocks since they are mostly publicly traded. In theory, investors could also buy multiple REITs to diversify their real estate portfolio without thinking about huge capital overlays.
However, Stacked also mentioned that trading in the public market could cause volatility since investments are correlated to the entire market. Therefore, there is no guarantee that REITs will be protected, mainly when a crash in need occurs.
The most significant benefit of real estate syndication is that investments are available in every state and country across all asset and property types. Thus, diversifying investments through syndications is highly accessible and could be quickly done, according to Stacked. Syndications also prioritize investors even during a downturn, where they would be given distributions first even if revenues are slim. However, the risks of syndications are enormous, especially if placed at the wrong management’s hands.
Most real estate private equity firms tend to invest in private companies that invest in real estate as well, as Stacked reveals. Because private equity firms do not invest in properties themselves, the main advantage of investing in the right private equity firm is that investors no longer need to invest in private companies themselves to diversify, especially if that private equity firm has a very diverse investment portfolio of real estate companies in various markets and asset classes. However, entering a private equity firm is often more expensive than syndications, which start at around $250,000 or more.
It is proven over time that a diversified portfolio of passive CRE investments insulates investors from crashes and downturns in the market. This is because the main objective of diversifying your passive CRE investment portfolio is to maintain a certain level of financial return and compound the wealth that is being used for these investments. Suppose you are an investor who is looking to diversify your passive CRE investment portfolio. In that case, Stacked advises you always to be proactive, never miss any opportunity, and create connections with brokers and real estate agents through social media and other platforms to succeed with your plan.