Why Is Real Estate a Great Alternative to the Stock Market?

Posted by: mihaighimciuc 9 December 2020 No Comments

The stock market has performed unpredictably in the past several years, rising and falling in seemingly irrational ways. While some experts anticipate rising prices for years to come, others are expressing greater concerns about an economic recession. Meanwhile, average investors in the middle are feeling more confused and uncertain than ever before.

It’s no surprise, then, that so many stock investors are seeking an alternative to the stock market. One of the best alternatives available is real estate—but what makes real estate such a powerful alternative to stocks?

Flexibility

First, and perhaps most importantly, real estate investing gives you a lot of flexibility. There are many different ways to invest in real estate, and many different ways to make money with your investment. It’s possible to get involved, whether you have tens of millions to invest, or just a few thousand dollars. This makes real estate investing incredibly accessible, and it can fit into nearly any type of portfolio.

For example, consider these different modes of investing:

  • Residential vs. commercial. Depending on your goals and current experience, you could consider investing in residential properties or commercial properties, tapping into average home renters or business renters accordingly. Commercial properties tend to be bigger and more expensive, but they can also offer a higher return on investment.
  • Rent vs. You can also optimize your strategy for cash flow or long-term appreciation. If you purchase a rental property, you can collect rent from your tenants, often in excess of your monthly expenses; this results in a steady monthly profit. You can also choose to invest in properties for their long-term appreciation value, or strive to achieve a mix of both.
  • Single family vs. Single family properties tend to be simpler and easier to manage, but they’re very susceptible to vacancies. Multifamily properties provide you with more stability, but can often be more expensive and more complex to manage.
  • Direct investment vs. crowdfunding vs. REITs. It’s possible to invest in a property by yourself, but this can increase your financial risk—and you may not have enough money to get started. That’s why real estate crowdfunding exists; it allows you to contribute money into a pool, which is then used to invest in properties (often multifamily properties). This way, you can benefit from the cash flow and growing value of real estate without bearing the entirety of the risk involved. Similarly, you could also invest in real estate investment trusts (REITs), which trade on the market much like stocks or ETFs.

Resilience to Economic Turmoil

Real estate is also considered a good alternative to the stock market because it historically bears greater resilience to economic turmoil. While the real estate market has its ups and downs, just like the stock market, it isn’t as sensitive to political changes, economic data, and other variables. The stock market might swing wildly based on a piece of new information concerning interest rates or government regulations, while the real estate market remains relatively stable.

“Real” Nature

Some people appreciate the fact that real estate is, as the name suggests, a “real” investment. If you own stock, you own fractional shares of publicly traded companies. While valuable, this is a conceptual form of ownership. In other words, it exists in your imagination and the imagination of others. If you purchase a property, you can see that property, touch it, and even live in it. Its value can’t be compromised the same way.

Neighborhood and Diversification Options

Investing in real estate also gives you free range of neighborhoods to choose from, especially if you’re crowdfunding or working with a property management company. If the homes in your area are too expensive, you can consider investing in promising neighborhoods all across the country—or even all over the world.

In line with this, it’s possible to diversify your real estate portfolio. Over time, as you make more money, you can purchase multiple properties in different areas. You can capitalize on a number of different neighborhoods, and purchase multiple different types of properties as well (like single family vs. multifamily properties). This way, if there’s a severe market crash in one specific area, you won’t lose too much value, and if one of your properties must be closed for renovations, you’ll still have cash flow from other properties to sustain you.

The Importance of Diversification

While real estate is a valuable alternative to the stock market, it’s not a perfect investment. There’s no such thing as a perfect investment. If you want to see the best possible results for your financial portfolio, you’ll need to diversify your investments carefully, using a wide variety of assets and strategies to protect yourself from risks.