How real estate investing may help mitigate the risks of market volatility on your portfolio

In the early days of the pandemic, the Dow Jones Industrial Average lost 37% of its value in a little over a month. But in subsequent months, the stock market rebounded almost as quickly as it fell. This is an example of volatility for better or worse, depending on your portfolio.

Private real estate is, by its nature, generally less volatile than the stock market. However, the lack of volatility does not necessarily translate to private real estate not fluctuating in or losing value. Further, the value of private real estate investments will fluctuate, and the value of real estate may lag behind general market conditions. In contrast with the stock market, real estate can generally be less volatile. A few of the reasons may include:

Longer-Term Holds

We all know the adage 'buy low, sell high.' But when there's an economic downturn, nervous investors might choose to sell on the downswing in an attempt to protect a greater portion of their potential earnings. After all, it's better to lose $1.00 a share than $10.00, right? But this rush to sell, which is incredibly easy thanks to e-trading platforms, can cause an even more significant price drop, which in turn can lead to more panic selling.

Real estate investments, on the other hand, work in years, not days or weeks (or even quarters). Generally, real estate projects target a hold period of at least two years, some target as many as ten. This means your real estate investment may ride out any current market volatility and sell when the market returns to being more stable and the project is may command a favorable sales price. Private placements are illiquid investments that are intended for investors who do not need a liquid investment, meaning you can't sell or access it whenever you want.

Real Estate Is Local

While there are always exceptions to the rule, when the public markets are volatile, typically companies may feel that volatility first-hand. Real estate values, on the other hand, can also be more impacted by local market drivers. For example, apartment rents rise in metros that people are moving to. Ski resort reservations explode in the winter but often vanish in the summer. Industrial properties in port cities are bustling around-the-clock. It's not to say that what's happening in public markets on a national level won't impact real estate values, but the local situation is often more relevant.

Real Assets, Real Values

Real estate investors can potentially earn income in two forms: ongoing cash flow generated by income, or from a share of the property's final sale price, though it's important to remember distributions are not guaranteed. Property values may rise and fall during market cycles, but generally they tend to appreciate over time. More conservative business plans might assume less appreciation over time, but anticipate more steady cash flow, while more opportunistic projects typically hope for significant appreciation over the hold period. For instance, an apartment building that is worth $28 million in year one might sell for $45 million in year six due to significant property improvements that ultimately increased the value of the building. Overall, commercial real estate prices increased by 24% in 2021 with significant price appreciation in most property types.

Volatility is something every investor will face, but real estate investments can be a valuable addition to your investment strategy and may help mitigate the risks of market volatility.