Stocks vs RE: who wins?
Real Estate Private Equity vs the Stock Market—Which One Wins
As COVID-19 spread from a Wuhan crisis to a global pandemic, stock prices plummeted and volatility soared. In mid-March 2020, volatility reach levels unseen since October 1987 and December 2008. From the latter days of March, and through April 2020, volatility slowed, but remained above pre-pandemic levels. Throughout the rest of 2020, and throughout all of 2021, the stock market did well, supported by interest rates at record lows, liquidity to burn, and market optimism.
When prices rise to record and near record highs, stock market investors often look to realize profits by liquidating their shares, and perhaps reinvesting during a market correction.
While global stock market movements are based on economic nuts and bolts, they are also influenced by rumor, geopolitical events, and speculation. There is no single factor that influences the stock market.
Currently, we see 2 major ideas at play, each creating volatility and downward pressure on stock prices.
The first is the specter of increased interest rates. Although on the horizon for a long time, it receded from consciousness as the Dow marched steadily upward. We all know it's only a matter of time before interest rates jump. In fact, all that remains to be known is, How high?
The second is a geopolitical concern where Russia’s invasion of Ukraine is wreaking havoc on oil and food prices.
Interest rates
Investors, seduced by an unprecedented stimulus package and low bond yields, turned to riskier assets, such as stock. This contributed significantly to the out-sized performance of the DJIA and S&P 500 during the latter months of 2020, and throughout 2021.
However, most foresaw that the record low interest rates and high liquidity resulting from the Fed’s policy of quantitative easing (QE) would end one day. As with past economic cycles, what goes up must come down.
The stock market reacts to high interest rates in much the same way vampires react to a crucifix. Higher interest rates are anathema to the stock market because high rates increase borrowing costs for the companies on the exchanges, which hurts profits, causing share prices to fall.
We know that when there are options other than stock for yield, investors tend to re-examine their risk and expensive shares lose their appeal.
High rates mean that those invested in the primary bond market will earn higher returns on new issues, which forces down prices of outstanding bonds in the secondary market, so then they pay less.
Geopolitical Concerns
If rising interest rates aren’t trouble enough, the military action in Ukraine is spooking investors and causing sharp drops in global markets.
European, U.S. and other markets tumble as the Russian foray in Ukraine continues.
Is Investing in Real Estate Private Equity a Better Option than Stock?
Investors looking for the door, as risks rise, or, for those who value a secure investment, an investment in real estate may be the answer.
Real estate is a wonderful alternative to stock, offering lower risk, superior returns, and diversification. Land is forever and people will always need somewhere to live.
Deciding whether to invest in real estate or stock is a choice and depends on a person’s financial situation, tolerance for risk, aims, and knowledge of the real estate market. Both offer different risks and opportunities.
Investing in real estate provides a passive income stream in two significant ways: collecting rents and appreciation.
Investment in multi-family real estate often leads to passive income from the get-go, because the property is generating rental income each month. Investors in the deal will receive regular distributions representing an average seven percent cash-on-cash return, while concurrently, the property is likely to appreciate in value.
Key Advantage of Multi-Family Real Estate investing
Investing in the stock market, on balance, represents higher inflationary and economic risk than does an investment in real estate and, of the many real estate investment options, multi-family real estate is the most favored.
Financing
Financing is broadly available from multiple lenders to purchase multi-family buildings and the upside of leverage is that gains are expanded. Loans for the purchase of multi-family properties can be had at comparatively low rates, notwithstanding the recent increases . Refinancing the property is another mechanism available to real estate investors, and it allows the investor an opportunity for tax free access to their equity.
Effects of Depreciation and Capital Expenditure
Capital gains taxes from gains on income from rental property are rarely a factor, because deductions for capital expenditure and depreciation from the property’s income negate the tax bite. Obviously, this increases profits for investors.
Value-Adding
Many multi-family properties are ripe with opportunities to renovate or upgrade, which is known as value-adding. Adding value can justify increased rental fees, which plumps up the bottom line. It also encourages appreciation.
Exterior improvements, landscaping, painting and unit upgrades, such as bathroom remodels, kitchen upgrades, the addition of niceties, and other improvements are just a few examples of value-adding.
Professional Commercial Lenders Are Big Investors in Multi-Family
The largest source for funds in multi-family apartments are commercial lenders, who usually offer 70%-80% of the money needed to acquire such properties. Their due diligence includes research on the market’s merits and the track record of the multi-family building’s operators.
Risk ratios
One economic that measures the return after adjusting for risk is the Sharpe ratio. A high Sharpe ratio indicates good returns and lower risk. Commercial multi-family has the best Sharpe ratio within the real estate asset class.
Final Thought
Over all, real estate is the greatest driver of wealth for most now more than ever, even considering the interest rate increases and geopolitical tensions resulting from regional wars across the globe.