Eggvesting Blog Archives - Page 3 of 6

Preserving the American Dream

Apr 10, 2023

In recent years, there has been a surge in institutional investors and real estate investment platforms acquiring single-family homes as an asset class. While this strategy may generate short-term profits for these firms, it threatens to undermine the foundation of the American Dream and erode the wealth-building opportunities for millions of households. In this article, we will explore the potential consequences of institutional investment in single-family homes and explain why HappyNest chooses to stand apart from this trend, focusing on preserving the American Dream and fostering long-term financial stability for all.

The Downside Risks of Institutional Investment in Single-Family Homes:

Creating a Generation of Renters: By converting single-family homes into rental properties, institutional investors reduce the availability of affordable homes for potential homeowners. This shift in the housing market pushes more people into long-term renting, stripping them of the opportunity to build wealth through homeownership. As a result, wealth inequality widens, and the traditional path to financial stability becomes less accessible for many Americans.
Market Risks and Unintended Consequences: Institutional investment in single-family homes can lead to inflated housing prices and increased market volatility. As these large investors compete for properties, they may drive up prices, making it even more challenging for first-time homebuyers to enter the market. Additionally, the influx of institutional capital can create market dynamics that are susceptible to economic shocks, increasing the risk of another housing crisis.
Neighborhood Stability and Community Impact: As institutional investors buy up single-family homes, neighborhoods can lose their sense of community and stability. Long-term homeowners who have deep roots in the area may be forced to relocate due to rising property values and taxes. This displacement can weaken the social fabric of communities and disrupt the lives of individuals and families who have called these neighborhoods home for years.
Lower-Quality Property Management: With institutional investors managing large portfolios of single-family homes, property management may suffer. The focus on maximizing profits can lead to cost-cutting measures, resulting in deferred maintenance and a decline in the overall quality of the homes. Tenants may experience decreased responsiveness to maintenance requests, and neighborhoods may see a decline in property upkeep, negatively impacting the living experience and property values in the community.
Barriers to Entry for First-Time Homebuyers: As institutional investors acquire single-family homes, they often outbid individual buyers in the market. This competition can create significant barriers to entry for first-time homebuyers, who may struggle to compete with the deep pockets and aggressive tactics of institutional investors. Consequently, many potential homeowners may be priced out of the market, making it more difficult for them to achieve their dream of homeownership.

By recognizing and addressing these additional potential downside risks, we hope to emphasize the importance of responsible real estate investment practices that prioritize the well-being of individuals, families, and communities.

HappyNest: A Differentiator in the Real Estate Investment Landscape

HappyNest firmly believes in the importance of preserving the single-family home as a cornerstone of the American Dream. We understand the value of homeownership as a wealth-building tool for families and are committed to ensuring that the opportunity remains available for future generations. By consciously choosing not to invest in single-family homes, HappyNest differentiates itself from competitors and demonstrates a commitment to the long-term financial well-being of American households.

Our investment strategy focuses on commercial real estate, which not only provides investors with diversified portfolios but also avoids contributing to the potential negative consequences associated with institutional investments in single-family homes. This approach aligns with our mission to empower individuals and communities to achieve financial stability without sacrificing the American Dream.

Join HappyNest in Upholding the American Dream

The growing trend of institutional investment in single-family homes poses significant risks to the fabric of American society and the wealth-building opportunities that homeownership has historically provided.

At HappyNest, we take a stand against this trend and pledge to prioritize the long-term financial well-being of American households above short-term profits. By concentrating on commercial real estate and alternative assets, we strive to offer our investors a diversified and responsible investment platform.

By supporting real estate investment platforms like HappyNest, which prioritize commercial real estate over single-family homes, you can be part of the solution to safeguard homeownership opportunities for generations to come.

Together, we have the power to shape the future of real estate investing and create a more equitable and prosperous society for all. Let us stand united in our commitment to uphold the American Dream and protect the single-family home as a cornerstone of financial stability and wealth-building in our nation.

We encourage you to share this article, discuss it with your friends and family, and join the conversation on social media. The more people we can rally to this cause, the more significant the impact we can make in preserving the American Dream for future generations. Stand with HappyNest as we work towards creating a brighter, more secure financial landscape for all.

About the Author

Jesse Prince, a combat veteran, CEO of HappyNest, and a seasoned commercial real estate entrepreneur, is passionate about making real estate investing accessible to everyone. With the innovative HappyNest investment app, Jesse empowers investors of all budgets to grow their nest eggs through quality real estate investments. Jesse’s expertise spans various aspects of real estate, including acquisitions, asset and property management, valuation, credit analysis, and real estate securities evaluation.

REITs and the Taxman: How to settle the bill

Dec 22, 2021

By Tanja Fijalkowski

For those just getting their beaks wet with REIT investing, we have some news: Uncle Sam wants his crack of the nest egg.

A basic understanding of REIT tax mechanics can help trim the tab and your nest egg in tip top shape.

REIT income taxation 101

When tax season rolls around, REITs send shareholders a 1099-DIV form summarizing the growth of the principal investment as well as the cumulative dividend payouts for that tax year.

In most cases, REIT investors simply need to input the information from the 1099-DIV form into TurboTax, H&R Block, FreeTaxUSA, or other preferred self-filing software.

With the exception of the 1099-DIV form, REITs generally do not require any additional paperwork.

In the eyes of the IRS, there are two components to REIT taxation:

Dividends
Capital gains or losses (resulting from the sale of an REIT stake)

Here, we’ll break down how they are handled and what variables impact taxation rates.

On the backend: REITs and corporate tax

REITs are granted favorable tax status if they meet the following conditions:

90% of their income is distributed to shareholders in the form of dividend payments
75% of income is generated from real estate activities

In return, they are considered “pass through” corporations (like LLCs and S-corporations) and exempt from paying corporate taxes.

Consider that other types of dividend distributions, like those that come from profit-sharing stocks, are first taxed at the corporate level.

This bodes well for REIT shareholders – there’s more pie to go around.

REIT dividend distribution taxation

However, that pie isn’t getting off scot free. Though they weren’t taxed on the corporate level, they are taxed on the individual (shareholder) level.

REIT dividend distributions fall into one of three taxation buckets:

Ordinary income, marginal rate
Long-term capital gains
Return on capital

Here, we’ll go over each category and how to know where your 2020 REIT dividend payments fall.

Ordinary income

The U.S. tax code classifies dividend distributions of any variety as either ‘qualified’ or ‘ordinary.’

Because the investor receives the untaxed REIT payment, dividend distributions are considered ‘ordinary’ or ‘non-qualified.’

In the majority of cases, REIT dividend distributions are categorized as ordinary income – the same bucket as the salary your employer pays you, bonuses,

commissions, tips, income from your own business, etc.

In 2017, Congress passed the Tax Cuts and Jobs Act, which included an advantageous tax perk for REIT investors.

REIT dividend distributions were granted a 20% deduction, which lowers the taxable amount.

For example: If an investor received $10,000 in REIT dividend distributions in 2020, only $8,000 of it is added to their taxable income for the year.

Ultimately, the rate of taxation of your REIT distributions will depend on your total income for that tax year. That figure is subject to the federal government’s progressive income taxation rate, outlined in the table below.

2021 Federal Income Tax Brackets

Rate	Single Individuals	Married Individuals Filing Joint Returns	Heads of Household
10%	Up to $9,950	Up to $19,990	Up to $14,200
12%	$9,951 to $40,525	$19,901 to $81,050	$14,201 to $54,200
22%	$40,526 to $86,375	$81,051 to $172,250	$54,201 to $86,350
24%	$86,376 to $164,925	$172,251 to $329,850	$86,351 to $164,900
32%	$164,926 to $209,425	$329,851 to $418,850	$164,901 to $209,400
35%	$209,426 to $523,600	$418,851 to $628,300	$209,401 to $523,600
37%	$523,601	$628,301+	$523,601

The tax rate of your dividend distributions will depend on your total net income for that calendar year.

Long-term capital gains

While the majority of REIT income is taxed as ordinary income tax, some of the dividend distributions may instead be subject to a capital gains tax.

In most cases, capital gains tax rates are preferable to income tax rates because they are usually lower.

Dividend distributions that qualify for the preferred capital gains tax are the product of incidental events.

Most commonly, it is income generated from the sale of a property in the REIT’s portfolio that is in turn distributed to shareholders> The only condition for the proceeds from a sale to qualify for long-term capital gains tax is that it must have been held in REIT’s portfolio for at least a year.

Not to worry – the 1099-DIV form will parse out how much of your total distributions will be subject to ordinary income tax (Box 1) versus capital gains tax (Box 2).

Return of capital

Lastly, a portion of your total REIT distribution income may be classified as ‘return of capital,’ which you will find in Box 3 of your 1099-DIV document.

The good news is that any funds that fall into Box 3 are tax free (woo hoo!) – for now.

In short, the REIT is returning a portion of investors’ principal investment.

Because you already shelled out taxes on your initial investment, you won’t need to pay taxes again when that capital is returned to you.

However, return on capital income could have tax implications downstream.

When the REIT returns a piece of your original investment in the form of distributions, you aren’t selling your shares in the REIT.

Instead, your cost-per-share is reduced.

For example:

You bought 100 shares of HappyNest’s REIT at $100 per share.
In a dividend distribution, HappyNest distributes $5 per share return on capital.
You would see $500 ($5 x 100 shares) in Box 3 of your 1099-DIV
After, your cost per HappyNest share is $95.
A few years from now, you sell your HappyNest holdings at $200 dollars per share.
Because of that $5 return of capital distribution, your profit on the sale would be $105 dollars per share ($200-$95=$105).

The profit from the sale of REIT shares is subject to taxes in the year of their sale.

Reinvested dividend taxation

If you are reinvesting your REIT dividend distribution, the distribution is still considered taxable income.

Principal investment taxation

As far as your core investment, no tax applies while it remains invested in the REIT.

It only has tax implications if you sell your stake.

If you liquidated out of a REIT stake this year (i.e., sold you shares), there are a few more tax considerations.

If the shares you sold gained value while you were holding them, the profits (sale value – principal investment) are taxable.

The rate of taxation depends on how long you held your REIT stake.

Short-term capital gains tax

If you held the shares for less than a year, then any profits from the sale should be considered ordinary income and will be based on your income tax bracket.

Long-term capital gains tax

There is a tax incentive to hold your REIT investment for at least a year.

If you do, any profits from the sale of your shares will be subject to the long-term capital gains tax, which is generally lower than income tax rates.

2021 capital gain tax rates

Taxation %	Income
0%	$0–$40,400
15%	$40,401–$444,849
20%	$445,850

Capital losses

2020 proved to be a difficult year for certain sectors of the real estate market, especially the commercial office and retail sectors.

That means investors may have sold out of their REIT stake at a loss. Filers can subtract up to $3,000 worth of capital losses from their taxable income per year.

However, $3,000 is the maximum capital loss deduction allowed per year against your total earned income. Losses that exceed $3,000 can be deducted from future tax filings.

A lucrative investment

Taxes might not be great dinner conversation, but they are the tail-side of the wealth-growing coin.

Tax efficiency can have big implications on your bottom line. Working with a tax professional to better understand how taxes work can further your financial education and optimize your tax bill.

And there’s no better investment than that of your financial knowledge.

5 real estate market predictions for 2022

Dec 7, 2021

By Tanja Fijalkowski

As 2021 draws to a close, we’re looking ahead for our annual real estate market predictions, 2022 edition.

There are two big variables that could impact how things might play out. First, whether the prices of lumber and building materials that have spiked over the past year will correct, continue at elevated levels, or possibly even continue to climb.

The second factor is whether or not the Federal Reserve will do anything about high levels of inflation and raise interest rates.

So far, there haven’t been strong indicators that they will. As such, the following real estate market predictions for 2022 assumes fiscal policy and commodity prices will continue in the same trend they are now – upwards.

Here are HappyNest’s five real estate predictions for 2022.

1. The housing market will continue to see double digit growth

After an unbelievable year that saw appreciation rates nearing 20% on the tail of 2020’s 7% gains, people began to wonder if perhaps we are in a housing bubble.

We’re probably not. The reason is that much of the influx of demand that came into the market is investment institutions (hedge funds, banks, etc.).

While the mainstream media claims it’s Millennials entering the market, this is simply not true. First of all, there is always some organic turnover as young adults reach their home-buying years. Millennial have been very delayed in this regard. After a decade of setbacks, those entering the housing market for the first time represent a minority of buyers. Additionally, many of them are buying as couples – even friends are teaming up – as homeownership would otherwise be unattainable.

The Federal Reserve has kept interest rates as 0% since the onset of the pandemic. That money is lent out to big banks. This money finds its way into various investment vehicles – hedge funds, private equity, etc. – who have been buying up houses like hotcakes. Earlier this year, Zillow accidentally over-purchased almost 7,000 homes.

However, the Fed’s low interest rates aren’t being passed onto consumers. While mortgage rates are low, the criteria around who can get mortgages in the first place has tightened.

Bank lending multiples have declined significantly over the last decade. Now, the average mortgage lending multiple is about two and a half times the borrower’s income. Less than five years ago, it was about four times the annual income of applicants with good credit.

With the Fed’s printer still humming and interest rates still near zero for banks, there’s no reason to think they will cease buying up houses, adding a steady stream of demand side pressure and driving up prices in the housing market.

2. The Industrial and Logistics sector will have exponential growth

Our real estate market prediction for 2022 is the industrial and logistics sector will continue its exponential year-over-year growth.

The massive growth in e-commerce that started accelerating aggressively at the onset of the pandemic has held strong through 2021, as we predicted. As of right now, there’s no discernible reason to think that trend will slow down in 2022.

Filling all those online orders requires big industrial shipping facilities, much like HappyNest’s flagship property. Currently on a 10-year lease with FedEx, the real estate market outlook for this sector is so promising, rent increases are already in the lease terms.

The warehouse market has seen tremendous growth, and trucking remains the primary domestic transportation route. As retailers continue to scale up their e-commerce activities, the demand for these limited-supply properties will drive prices even further up. There have already been reports of warehouse lease rates soaring due to skyrocketing demand. Every one of those warehouses will need semi trucks to deliver the stock to retailers or consumers, therefore the need for industrial properties sustaining or continuing its appreciation is all but guaranteed.

HappyNest’s industrial property is in a strategic location for nationwide operations. It is located in Fremont, Indiana. It is nestled between three major interstate in America’s heartland for maximum efficiency.

3. Office real estate will improve, but not recovery fully from the pandemic

One real estate market sector that might experience growth on a year-over-year basis is the office sector. However, that growth will only partially recover from the dive the sector took from the onset of the pandemic. That’s because a huge portion of the remote work force doesn’t want to return to the office.

For that reason, a year-over-year perspective doesn’t provide the scope needed to understand this corner of the real estate market.

Because since then, several large-scale companies have announced that they will not require large portions of their workforce to return to the office at all. Additionally, small and mid-sized businesses appreciate the financial lift off their operational overhead now that they’ve worked out the logistics of running their companies remotely.

With an influx of supply and reduced demand, out real estate market prediction for the office space sector is a reduction in rates to seduce companies into leases and recondition them to the 9-to-5 work life the pandemic interrupted.

With new virus variants creating some uneasiness around calling the workforce back into the office, this sector may find themselves with vacancies on their hands long-term. Buildings whose zoning support it may find a different use cases, such as an AirBnB, housing, or hotel conversion.

4. Investment capital will continue to sweep into all sectors

With the Federal Reserve keeping interest rates at zero, thereby making lending capital to banks and financial institutions all but risk free, more investment capital will flow into all real estate sectors.

Considering the back drop of high inflation levels, keeping cash on hand is somewhat of a liability for banks. No where is this better evidenced than the Federal Reserve’s reverse repo market. The use of the fed’s reverse repo is at all time highs – and on an eye-popping exponential curve.

The Federal Reserve's reverse repo use levels are a variable in our real estate market predictions — Source: The New York Federal Reserve

Real estate has long been a hedge against inflation. Continuity of current policy is the Federal Reserve implicitly encouraging large financial institutions to buy up assets in quantity. From financial institutions’ perspective, while capital is available at 0% interest rates, why not keep adding assets to their balance sheets?

The reality is, in light of the tremendous double-digit gains in several real estate sectors (notably, the housing market and industrial sector), even what would usually qualify as a major correction wouldn’t fully undo the gains since 2020.

Until the Federal Reserve signals a meaningful change in policy, such as raising interest rates or pulling cash out of circulation, it is our real estate market prediction that the real estate market at large will continue to see increased demand in all sectors.

Compounded with the private sector’s strong interest in real estate and you’ve got a recipe for big pumps. Investors want to be on the right side of that.

5. Migrations and mass relocations will have regional effects

Ever since the major shutdowns of 2020 that have meaningfully reshaped the workforce and untethered former office workers from their workplace, some cities are experiencing major exoduses while others are experiencing major influxes.

Austin, Texas in particular has seen tremendous growth. In 2020, Austin’s population grew by almost 3.5%. Partially thanks to Elon Musk, Austin’s population is on track to gain another 3.6% in 2021. Several large companies, including Apple and Google either have plans to move or expand operations through 2022.

Of course, the people moving to cities like Austin and others that are experiencing growth are coming from somewhere. Notably, all three companies with plans to move to Austin are currently headquartered in the Greater San Fransisco Bay Area. This exodus of thousands of jobs is already being felt in Bay Area real estate prices.

Likewise, Boise, Idaho has experience tremendous growth over the last two years, and housing prices have followed suit. Major metropolises like New York City and Chicago have experienced population contractions.

Large-scale population shifts will be felt asymmetrically across the nation as supply-demand dynamics change on a regional level.

HappyNest’s real estate market prediction

As our final real estate market prediction, HappyNest remains confident in its portfolio performance for 2022 and beyond. We remain well fortified against the uncertainties in the times ahead. Properties in our portfolio will presumably remain in demand as well as appreciate. We are not anticipating any vacancies. With strong, financially stable tenants on long-term leases, we expect rent income to continue uninterrupted for the foreseeable future.

We look forward to sharing the wealth and paying out to HappyNest shareholders in the form of quarterly dividends and property value appreciation.

Wishing you a happy holiday season and a prosperous New Year from all of us here at HappyNest.

Saving vs. investing: Which should you be prioritizing?

Nov 9, 2021

By Tanja Fijalkowski

Saving vs. investing – the age old question. Which makes more sense for your long-term financial future?

Both saving and investing come with their own risk-reward profiles, and the best strategy varies from person to person. Sometimes, it makes sense to change course due to the changing external factors of life.

Here, we’ll explore the profiles of both for your consideration to help you better understand the merits and drawbacks.

Macroeconomics of saving vs. investing

Context is key.

Macroeconomics (i.e., the ‘big picture’) are important considerations when comparing saving vs. investing.

Some key concepts worth factoring into your decision making are inflation and the dollar’s purchasing power.

They are functions of each other. They have an inverse relationship. When inflation is up, the dollar’s purchasing power goes down. That’s because when inflation is high, the prices of goods and services goes up. You have probably noticed an increase in the cost of many regular expenses – your groceries, a tank of gas, perhaps your rent. This is the product of inflation.

Say every year, you allocate $100 to take your friends out to the movies while they’re all in town for the holidays. You’ve been doing it for decades.

In the year 2000, when movie ticket prices were $5.66, you would have been able to bring along 17 friends. In 2020, when the national movie ticket price averaged $9.31, you would have to make a few cuts, because now, you can only afford 10 tickets with the same amount of money.

You’re still putting up the full $100 – but what you can buy with that money has gone down.

While there are several economic indicators used to measure inflation rates, the one that is generally most significant for average Americans the CPI index. The CPI index measures a basket of consumer goods – from food, to gas, to rent – to estimate the increase in the overall cost of living.

As last reported by the Department of Labor, the CPI index has increased by 5.4% for the 12-month period ending in September 2021. That means life is about 5.4% more expensive than it was a year ago.

With that, we have some framework in which we can better assess if saving or investing makes more sense.

Risk management

The world of finance, proper due diligence doesn’t only evaluate potential gains and losses. It’s also about risk management.

Risk management considers the probability of different outcomes.

You likely weigh out the probabilities of different outcomes often in your daily life. For example, you look up a car mechanic in your area on Yelp! You find two – one that has numerous 5-star glowing reviews, and another with numerous 1-star complaints. The former is more expensive.

But you decide to do business with them despite the higher cost, based on from pervious customers. You are betting that the lower the risk of getting ripped off or having a faulty repair done – worth the extra cash.

This assessment of likelihood of desired outcome is arguably more important than determining potential outcomes. After all, most people would take 50-50 odds of winning $1,000 than a one in a million chance of winning a million dollars.

Savings: A guaranteed loss

For most people, keeping their money in a savings account feels safe. It is safe in that money kept in a savings account is secure and insured.

Additionally, money kept in a savings account is essentially instantly accessible in times of need. If a financial emergency required $5,000 to be paid on the spot, having the money in a savings account readily available can prevent you from having to put the expense on credit and pay interest rates in the 20%+ range.

But by other measurements, it’s quite unsafe. With inflation rates topping 5% in just one year, the value of your money it is a guaranteed loss. In other words, there is a 100% chance that the purchasing power of your savings accounts will decline as inflation goes up.

With inflation rates at historical highs and showing no signs of subsiding, it’s critical to understand that money sitting in a bank savings account is losing value.

If your bank pays you an annual interest rate, that does help a little. But with most bank savings accounts offering around 0.5% interest annually, it is hardly offsetting about 10% of the value lost to inflation.

In a nutshell, given the current rate of inflation as the cost of living goes up, the risk-reward profile of keeping money in a savings account breaks down to:

Loss potential: Very high probability
Loss max: Capped at the rate of inflation (-5.4% in purchasing power for 12-month period ending in September 2021.)
Gain potential: Very low probability
Gain max: Decline in the cost of living
Other considerations: Easy access to funds

Investing: A risk of loss, and potential to gain

The alternative way to store your hard-earned dollars is in the form of investments.

With a savings account, you can, with a fair degree of certainty, know what to expect.

Investing on the other hand has many more possible outcomes, each with its own risk-reward profile.

However, with investing, there is a much higher probability of staying ahead of inflation in the form of returns. If a $100 investment produces 6% in returns for in a year, the extra $6 in profit fully offsets the purchasing power erosion effects.

Funds held in investments aren’t any more protected from inflation than those held in savings accounts. But unlike money kept in savings accounts, there is potential to gain on investments – potential that essentially does not exist with savings accounts.

No investment is risk free

As a general rule of principal, the higher the risk, the higher the potential reward. Traditionally, the safer the investment, the lower the reward potential. The higher the risk, the higher the potential returns – but also a lower probability of hitting those returns, and a higher possibility of losing your investment.

For example, odds of ‘losing it all’ on blue chips stocks aren’t high. Companies like Microsoft and Johnson & Johnson are likely to survive even sharp market corrections.

But they aren’t likely to top the potential gains of a unicorn penny stock that really hits it big. That being said, for every unicorn penny stock investor that hits it big, there were thousands of others who took losses on penny stocks.

Every investor has to decide their own risk tolerance.

In sum, the risk reward profile of investing:

Loss potential: Very low–very high (depending on investment, e.g., blue chips vs. penny stocks)
Loss max: Capped at initial investment (unless engaging in short selling)
Gain potential: Very low–very high (depending on investment, e.g., blue chips vs. penny stocks)
Gain max: Uncapped; infinite potential
Other considerations: Lower liquidity. Some investments, like stocks and crypto add a 1–3 business day delay to access your funds; alternative investments, such as real estate or commodities could make accessing your funds a long and involved process.

Saving vs. Investing

While everyone’s financial situation is different, with inflations eating away over 5% of the dollar’s purchasing power every year, keeping money in a savings account is in effect an almost certain loss.

Investing on the other hand, opens up the possibility of staying ahead of inflation.

For example, HappyNest is an REIT portfolio you buy into for just $10 per share. On average, the quarterly dividend payments average 6% a year, topping inflation’s erosion on your purchasing power.

In addition to the quarterly dividends, as the properties in our portfolio gain value, your investment does as well. As such, you not only keep pace with inflation and preserve your nest egg’s purchasing power, you also can gain value on your capital while it is invested.

Priorities

Remember: It’s not really about movie tickets, rent, the price of gas, etc.

Most Americans work for wages or salaries. They exchange their time for money.

In a savings account, time works against you. It erases hours you already clocked in – hours away from your family, your friends, your hobbies, your pets. Smart investing makes time your friend, opening up the opportunity to buy some of it back in the future.

Because it is time – not money – that is life’s most precious, limited and valuable asset.

Reach Your Financial Goals With a Diversified Portfolio

Oct 9, 2020

By HappyNest

Diversification is a key part of any comprehensive investing strategy.

It’s fair to say that deciding where to start or what to do can feel overwhelming with all the investment options out there.

Just listen to CNBC, Fox Business, or Bloomberg any day of the week, and you’ll hear dozens of opinions about where to invest your money.

“Buy stocks,” “buy bonds,” “buy gold!” “sell Bitcoin!” “buy real estate” – the options feel endless.

On the surface, the advice can be confusing and, at times, contradictory. Ultimately, they are all hinting at one fundamental piece of advice: diversify your portfolio.

What exactly is diversification?

Simply put, it’s the process of spreading your investments across multiple industries and asset classes. You’ve probably heard the saying “don’t put all of your eggs in one basket.” As it turns out, this applies, quite literally, to your investment portfolio.

To better understand diversification’s benefits, you must first understand modern portfolio theory (MPT) and correlation. MPT argues that an investment should be evaluated on how it affects an overall portfolio’s risk and return. This is important because the risk and return profile of one investment can influence an entire portfolio. When you have a diversified portfolio, you will have assets with varying levels of risks, returns, variances, and correlations.

As for correlation, it’s the degree of a relationship between two assets. For example, if two assets are perfectly correlated (correlation equals 1), when one asset price goes up, the other increases as well. Likewise, if one goes down, the other will too. A well-diversified portfolio includes assets with low correlation preventing the entire portfolio value from collapsing in bad times.

Integrating Diversification in your portfolio

So, what does a diversified portfolio look like? It includes a mix of real estate, stocks, bonds, treasuries and potentially other types of alternative investments. All these assets have varying risks, returns, and correlations with one another.

For example, Treasuries and bonds generally have lower returns than stocks and real estate. But they can be a good source of steady income. These are your portfolio’s lower-risk portfolio stabilizers. Real estate and stocks can provide more significant long-term returns but increase the overall portfolio risk. These assets are your portfolio’s growth engine.

According to PREA.org research, real estate and stocks have a low correlation of 0.07. Real estate has a -0.15 correlation with bonds. By investing in all three of these types of assets, your portfolio return is resilient from events that may affect real estate or stocks exclusively. A great example of why this is important is the 2008 Great Recession and the stock market drop in early 2020. Private market real estate did not necessarily lose its value even when stocks declined sharply. In fact, as bond values took a hit during this same period, private market real estate (multifamily, single-family, industrial, and logistics) increased in value. The private market real estate, in this case, stabilized the portfolio value for long enough to allow an investor to maintain their ownership in stocks, which of course, returned to near all-time highs as of the publishing of this article.

A diversified portfolio helps mitigate the effects of unfavorable market fluctuations while still allowing you to take advantage of the bull market runs. At the end of the day, it’s important to find the right balance of assets for your risk tolerance. Creating a well-diversified portfolio can help you hit your financial goals faster!

Real Estate Investing Tips for Beginners

Jul 16, 2020

By HappyNest

Whether you love your career and are looking for a secondary source of income or are thinking about changing careers and looking for financial stability, investing can help you achieve both. Here are some real estate investing tips for beginners.

Investing may sound scary, but it can be a lucrative, stress-free, and even fun activity for you and your family when done correctly. And you don’t have to put up your whole life savings or take on decades-long mortgages to get started either. That is a terrible idea. Instead, take an educated approach by researching investing options and consider investing in real estate to diversify your portfolio.

For the last 20 years, real estate has outperformed the stock market approximately 2-to-1. As long as you have a little money to invest, you can start making some tremendous financial improvements. Here is how to start.

Research the best apps for real estate investors

People have been investing in real estate long before apps were ever a thing. Now, there are plenty of apps for real estate investing that are easy to use and understand.

Many people are too intimidated to start investing in real estate because they think they’ll have to shell out tens of thousands of dollars to do so. That couldn’t be farther from the truth. In fact, with as little as $10, you can break into the real estate market.

Sure, the more money you put in, the more you’ll get out — but starting with a small percentage of your disposable income and some quality apps for real estate investors can help break you into this lucrative industry.

After you’ve downloaded an app and tossed some money in, you’ll be invested in real estate. Then you can set weekly or monthly recurring investments to grow your account value, and your real estate investing nest egg will begin to grow.

Get your finances in order

Again, you don’t need $50,000 to start investing in real estate. But you do need some extra cash on hand so you’re not risking too much on these ventures. Though investing in real estate has plenty of upsides, it’s still a fallible market.

Research everything and start small

Finally, no matter how much you know about investing in real estate, you should always be trying to learn more. Do as much research as you can and make sure you’re comfortable with the real estate before you start putting money into this sector. Also, make sure you’re starting with smaller projects. You can — and should — invest in commercial real estate, but don’t search for gigantic properties right off the bat.

If you’re excited about breaking into this sector and want to invest in real estate, make sure you’re doing plenty of research, saving money, considering top investing apps, and working alongside a trusted investment company to answer all your questions.