3 reasons you should be investing in real estate
TRANSCRIPT
After the economic recession of 2008,many people avoided investing in realestate. This was because this era wasoften linked with the housing bubble
and subprime mortgages. But thetruth is, real estate is a smart asset
class to invest in.
When you invest in real estate, youare purchasing a future income
stream from property. It is in realityquite unfair that real estate
investment is given a bad reputation.Here are a few reasons to invest in
real estate:
Investing in real estate can give youincredible potential to diversify your
portfolio. The correlation betweenreal estate and other major assetclasses is low, and in some cases,
negative.
One big upside to real estateinvestment is the sizeable proportionof total return, accruing from rentalincome over the long term. Between1977 and 2007, about 80 percent oftotal U.S. real estate return came
from income flows.
This leads to a decrease in volatility.Investments that rely more heavily onincome return have a tendency to be
less volatile than those that rely moreheavily on capital value return.
In addition, real estate is moreattractive than more traditional
sources of income return. The assetclass usually trades at a yield that is
premium to U.S. Treasuries. It isespecially attractive in an
environment with low Treasury rates.
Data from the National Council of RealEstate Investment Fiduciaries
(NCREIF) shows that over the 10-yearperiod from 2000 to 2010, private
market commercial real estatereturned 8.4 percent on average. This
has a lot to do with low volatilityrelative to equities and bonds.
Many critics feel the the reason realestate has a low volatility is that real
estate transactions have not beenfrequent. As a result, property values
are often determined using third-party appraisals, which often cause
the market to lag.
As a result of infrequent transactionsand appraisals, there is a smoothing
of returns. In an upturn, reportedproperty values tend to
underestimate market values. In adownturn, they tend to overestimate
market values.
Real estate volatility should beadjusted upward, but real time
markets could undergo sudden shocksat any moment. One example of thisoccurred during the “Flash Crash” of
May 2010.
In just 15 minutes, $1 trillion in stockmarket value was erased. When
market volatility is an issue and thedynamics of algorithmic trading aremurky, real estate is an attractiveinvestment due to its more stable
pricing.