Successful investing demands risk management through both economic and market cycles.
Stock investors are accepting increasing valuation risk as excess cash pushes stocks ever higher. The Federal Reserve is poised to “taper” their pumping of cash into the system, and the COVID recovery will level off. U.S. stocks should retreat to reasonable prices. Real estate is an excellent complementary asset to capture growth returns as we advance.
While market risks are abnormally high, economic fundamentals are still supportive. This is an opportune time to offset stock risks with real estate exposure, as job creation and rising wages are two of the most vital demand metrics. Housing demand is robust, and the growth of internet sales is driving warehouse values. While the retail and office sectors are shifting, consumers are out in force, and offices reopen.
Quality real estate returns a steady income and, over time, moderate appreciation.
This combination can rival stock returns with less risk and more stability. Investors who don’t have the funds or desire to buy individual buildings can still own real estate directly through traded and non-traded portfolios, called Real Estate Investment Trusts, or REITs.
Buying into an established portfolio of individual buildings offers several advantages. New development is challenged by the labor shortage and a sharp, 10% annual gain in steel & lumber costs. Quality buildings deliver current income, and prices benefit from inflation. Current demand in the housing and industrial sectors raises rents which also supports higher valuation. Real estate income is tax-advantaged when owned outside IRA’s, as depreciation converts some of the tax treatment to preferable capital gains rates.