How Real Estate Investing Complements Dividend Investing

Investors can gain exposure to real estate by purchasing securities in the public markets such as stocks, bonds, exchange-traded funds, or similar vehicles. One way to do this is by buying Real Estate Investment Trusts, or REITs.

One way to diversify in real estate is to own property. In this article, we’ll take a look at privately held real estate as a way to diversify against some of the market forces that are in play when investing in dividend stocks. Then we’ll dive into how real estate can be an effective diversification tool for investors.

Why own real estate?

First, let’s tackle why one would want to own privately held real estate. In short, this asset class is any real property that isn’t traded on a public exchange of some type. This could be a person’s primary residence, or a residential or commercial investment property. Exposure to this asset class generally takes a lot of capital, given that coming up with down payments for residences is generally on the order of tens of thousands of dollars. Of course, owning a home is a worthwhile investment for many because it allows people to build wealth while giving them a place to live. 

Meanwhile, for commercial properties, the price of entry could be in the hundreds of thousands of dollars. However, owning this asset class has certain benefits to the holder. First, and most obviously, is that it provides income to the holder of the asset. Buying an investment property means the holder expects some sort of financial return in the form of rent payments, and secondarily, asset price appreciation. Over time, real estate has proven to be a long-term winner in terms of asset price appreciation. 

Hedge against volatility

One benefit is that privately held real estate doesn’t experience daily price swings like those of publicly traded securities. This is referred to as volatility. While privately-held asset prices do move up or down over time, these swings aren’t visible to the holder of the asset, and only matter when/if it is time to sell. This has certain benefits from the asset holder’s perspective of knowing their property is a store of value, and not seeing daily, sometimes erratic price movements of their assets.

Apart from this lack of volatility in the asset price itself, rent payments are generally received on a monthly basis, meaning that the holder of the real estate receives regular income from their holdings, minus operating and/or financing costs of the asset itself. In this way, holding real estate is a great way to not only generate long-term wealth with asset price appreciation, but regular income as well via rent payments received. Real estate investing is quite similar to dividend investing in this way because the goals of both are the same: Regular income and long-term asset price appreciation.

Benefits of dividend investing

That said, dividend investing has certain benefits as well. Dividend investing, as mentioned, also offers the ability to see asset price appreciation and regular income, the same as real estate investing. This means that holders of dividend stocks and real estate can see similar benefits in terms of compounding wealth over time.

However, while dividend investing can prove to be a rollercoaster during turbulent stock market periods, it also offers a very important liquidity component.

Liquidity is the ability to effectively price and buy or sell an asset, and while real estate has many benefits, liquidity is not one of them. Privately held real estate isn’t priced on an exchange the way a stock is, which means that when an investor wants to buy or sell real estate, it is a very long process. This lengthy process can easily take months, and cost hefty commissions for attorneys, brokers, real estate agents, etc. These implicit and explicit costs are both harmful to returns for the investor, while dividend stocks don’t have any of those issues.

Dividend stocks can generate income and long-term asset price appreciation with the ability to buy and sell any day the stock market is open, with real-time asset pricing. Depending upon one’s goals, this may be important.

Dividend stocks can also be bought with minimal initial capital given that many brokerages offer the ability to invest with as little as $1. That means that investors that don’t have access to tens or hundreds of thousands of dollars of initial capital can begin their investment journey much sooner than those waiting to buy a property.

How they work together

Given that the goals of dividend investing and real estate investing are largely the same – long-term price appreciation and income – it makes sense that they would attract similar types of investors. Both asset classes offer certain benefits over the other. Dividend investing offers liquidity and low initial capital requirements, while real estate offers much lower volatility. Therefore, they can work together harmoniously.

Real estate and dividend investing can offer holders the benefits of both, which together, can mean higher portfolio liquidity and lower overall volatility when assets are split between the two classes. In addition, the two asset classes are priced in very different ways, so real estate may benefit from conditions where dividend stocks may not, and vice versa. This diversifying component can add to the lack of volatility from real estate investing and increased liquidity from owning stocks to create a very favorable overall portfolio mix.

Final thoughts

While investors have many choices in generating income from their capital, we see a mix of dividend investing and real estate investing as quite favorable. The benefits and costs of each asset class can be balanced with an allocation to both, providing important benefits to the asset holder.

Dividend stocks offer long-term capital appreciation and current income, with the prospect of income growth as dividend payments rise. Real estate offers the same potential benefits, but without the volatility of daily asset pricing. Real estate investing and dividend investing, therefore, are two different ways to achieve the same goals.

We see them as complementary – not exclusive.

Think outside the stock market: Alternative investments for 2021

Diversify your portfolio with alternative investments.

Those early in their investment journey might take that to mean buying stocks from a few different companies whose operations are uncorrelated.

But that would amount to a basket with some different colored eggs in it, all still bound to the fate of the basket.

Though the stock market is the investor go-to, the rise of algorithmic trading has tangled the performance of individual companies to the market at large.

That’s why investors are looking to diversify their portfolio not only within the stock markets, but in alternative investments.

What are alternative investments?

It’s easier to characterize alternative investments by what they are not. They are not cash, public stocks, and bonds. Consequently, they are generally less liquid and longer-term strategies.

On the upside, they open numerous avenues and opportunities ranging from safe investments with steady yield to high risk-investments with potentially quit-your-job returns. But where to start?

Here are seven alternative investment classes investors can consider.

Alternative investment 1: Private REITs

  • Barrier of entry: Moderate
  • Risk factor: Low
  • Potential returns: Above average

One way to get into the real estate market is through a private REIT. They have all the characteristics of REITs traded on the stock market, except they are privately held.

Real estate is widely considered to be a safe and reliable investment over time. Private real estate investment group investments are also insulated from stock market volatility since the aren’t caught up in EFT and other stock collectives.

A private REIT uses pools investor capital to purchase and maintain property. As a shareholder, you buy into that portfolio and enjoy the property value gains.

One of the biggest upsides to investing in property is that it generates income. Most alternative investments require capital to be tied up for an extended period of time, and any profit only comes at the point of selling. Real estate also accumulates profit for the point of sale in the form of market value. But it also had the added benefit of generating income while your capital is invested in the form of rental payments.

Compared to buying investment properties and managing them independently, REITs are a ‘set it and forget it’ investing strategy that involves zero late-night tenant plumbing emergencies nor tens, if not hundreds of thousands upfront for a downpayment and a commitment to a mortgage.

HappyNest, for example, allows investors to buy in for as low as $10. By investing in HappyNest, you become a partial owner of our portfolio, which includes an industrial shipping facility currently on a 10-year lease with FedEx and a commercial pharmacy on an 8-year lease with CVS.

That means your can build a passive income stream by becoming the landlord of companies you know are good for rent.

Alternative investment 2: Cryptocurrencies

  • Barrier of entry: Low
  • Risk factor: Above average
  • Potential returns: Above average

Right now, there’s little doubt the United States in poised for growing inflation in the years ahead. Trillions of dollars were printed and put into circulation without a corresponding growth in economic output.

That’s bad news for savers, and impetus enough for investors scrambling to find stable, alternatives to preserving their net worth.

That’s at least part of why cryptocurrencies have gained so much traction from investors.

Once considered somewhat of a joke by big-name investors, the attitudes around Bitcoin and other digital currencies has taken a drastic turn in 2020.

With global markets volatile and the future opaque, a currency independent politics, governments, and stock markets look pretty appealing nowadays.

Flagship Bitcoin has trail-blazed for other cryptocurrencies to get on the radar of institutional investors. Major companies like Microsoft, Shopify, PayPal, CashApp, and Amazon (through a third-party app) now accept Bitcoin, with more on the way.

Some of the brightest minds of our time have taken public interest in the space. Their involvement all but guarantees the space’s growth for the foreseeable future.

The upside to foreign and cryptocurrencies compared to other alternative investments is that they are highly liquid. You can also invest just a few dollars if you want to, so the commitment level is low.

This alternative investment has a promising long-term trajectory that is becoming increasingly difficult to dismiss.

However, there are still challenges ahead. The space will likely continue to experience high volatility in the coming years, so investors have to be able to stomach that.

That being said, the whiplash to those price swings can generally be remedied by zooming out on the time chart. The overall trend is still a steady march upward and forward.

Alternative investment 3: Gold, silver, and other precious commodities

  • Barrier of entry: Moderate
  • Risk factor: Above average
  • Potential returns: Variable

At the end of the day, gold is the heavyweight champion of alternative investments. After all, it is the undisputed GOAT when it comes to currency longevity. Silver and other precious commodities like copper,

There are several ways to get into trading these, but gold enthusiasts believe in its long term value as a hedge against the collapse of FIAT currency and/or the stock market.

There’s some truth to this claim. As the purchasing power of the dollar declined in the wake of the Great Recession, gold’s price went parabolic.

gold 30-year price chart history, gold is seen as an alternative investment class
goldprice.org

Precious commodity hodlers argue that it has intrinsic value not only in its widespread recognition, but because it also has industrial applications.

On the long term, the upside of gold and other precious commodities has held up for those with patience and long-term horizons. Gold holders had to ensure a major price correction and 7-year sideways period before finally seeing some movement to the upside in late 2019.

Alternative investment 4: Private credit: Private debt

  • Barrier of entry: Low
  • Risk factor: Above average
  • Potential returns: Above average

Peer-to-peer lending cuts the middle man (i.e., the bank) out of lending.

Through platforms like Lending Tree or Peerform, you can lend money (investment) to a person or a business. Then, you play banker and charge interest on repayment.

The returns on private debt can be high – in the double digits.

But for every yang, there’s a yin. High potential returns come with high potential risks.

Applicants’ risk profiles oftentimes do not meet the loan criteria for standard banks. That’s something the private lender (you) have to be willing to take on. If the borrower defaults, well, c’est la vie.

That being said, peer-to-peer lending as an alternative investment strategy tends to perform better in economic downturns. That’s because banks become more risk averse and tighten their lending criteria.

In a study released in August of this year by MarketWatch, the peer-to-peer industry was projected to grow by 30% – a sign that investors aren’t quite bearish on this alternative investment strategy just yet.

It’s also worth noting that the industry as a whole saw a high growth period after the Great Recession of 2008 as the credit markets recoiled.

That could mean that 2021 might shape up nicely for those with a bullish risk tolerance.

Alternative investment 5: Private equity

  • Barrier of entry: High
  • Risk factor: High
  • Potential returns: Max

Embrace your inner hipster: Find the next big thing before it goes mainstream.

That’s private equity investing 101.

The key differentiation between private equity and publicly traded stocks is that stake in the company is not available to just anyone.

And just like the sharks, private equity firms generally invest in startups, privately held companies, and companies in distress.

They provide the capital the company needs, either to scale or overcome an obstacle, as well as ‘business management services’ (for better or for worse).

At the end of the day, the goal of private equity investment is to generate value and return for investors – and a lot of it.

The good news is, according to global capital management firm Bain & Company, private equity investments have generated a 60% higher return on investment compared to the S&P 500 over the last 30 years.

The bad news is that unless you spend your Wednesday afternoons on the golf course, private equity might be prohibitively expensive to get into.

A $250,000 would be on the lower end of the entry price to go through an institution – and to be properly ‘accredited.’ But keep in mind: that buy in is still the coach class, boarding group C of private equity.

Alternative investment 6: Hedge funds

  • Barrier of entry: High
  • Risk factor: Medium
  • Potential returns: High

Hedge funds are similar to private equity. They pool investors’ money and make strategic deals they’re betting will produce return. They’re also similar in that they require investors to be ‘accredited’ (read: a certified rich person).

Like private equity, a $250,000 minimum investment is par for the course. It can run many times higher depending on the firm.

The key differentiator between hedge funds and private equity is the types of asset investments they make.

Like private equity, hedge funds also buy stakes in private companies. But hedge funds investment strategies are more diversified.

They also invest in public companies, real estate, and tangible commodities that appreciate like gold, fine art, wine, and collectibles (rumor has it the hedge fund manager who bet big on beanie babies in the ‘90s is no longer in the business).

Big hedge fund managers are the celebrities of Wall St. – Ray Dalio, George Soros, and Bill Ackman. Those with the means to buy into their exclusive club can ride their coattails into the sunset.

Warren Buffett, is not a hedge fund manager. What makes him different? Unlike hedge funds, the average investor can ride his coattails…by buying public shares in his company Berkshire Hathaway – no ‘accreditation’ required. No wonder he’s America’s favorite billionaire.

But if you can swing it and meet the accredited investor criteria, hedge funds tend to be pretty hands-off investments. After all…you’re outsourcing managing that part of your wealth to someone else.

Adding alternative investments to your portfolio

Now that you’ve expanded your view on potential investment opportunities, it’s time to consider if branching out makes sense to you.

If you’re portfolio is too concentrated in public equities and you want to manage your risk, allocating a slice of your net worth to a private REIT or other non-traded investment class will alleviate the pressure – and give you opportunities to catch big wins.

 

3 Reasons To Choose Real Estate Investment Funds

The vast majority of investors plan to increase their allocation of capital to real estate within the next two years. Actively managed real estate funds can give investors more affordable options and opportunities for their investment. What benefits can these funds provide you with as an investor? Here are three reasons to invest in real estate investment funds.

Greater Investment Returns

Some real estate funds give you the ability to reinvest your dividends. Dividend reinvestment can lead to higher returns from the compounding interest. In turn, this can generate more residual income. Before you invest, ensure that the portfolio is in the hands of an excellent fund manager and look closely at a manager’s overall track record. A successful manager should be happy to provide you with that information.

Portfolio Risk Minimization

An actively managed real estate fund can help provide insulation against stock market volatility by spreading risk across various types of real estate assets. The key to portfolio risk minimization is identifying segments of the real estate market that are resistant to swings in stock market volatility and investing accordingly. High-quality real estate fund managers will do this for you. For example, opportunities may exist to purchase new commercial real estate such as industrial warehouses that have seen increased demand due to E-commerce. Other possibilities include real estate that addresses affordable housing shortages and even repurposed office spaces for other uses.

When considering actively managed funds to help diversify your portfolio, look for high-quality assets that help mitigate potential risks of investing. Actively managed funds target a wide variety of assets; nevertheless, they are still easily accessible and can generate significant financial returns.

Lower Costs To Capitalize On Trends

Active funds can help you capitalize on trends quickly. These funds invest in real estate and real estate related equities, which allows them to capitalize on short and long term trends. But be careful, as quickly as trends come, they can go, which can affect profitability at these firms.

If you are looking for more opportunities to invest in real estate, actively managed real estate funds can be an ideal option for your portfolio. You can research these funds online or speak with a financial advisor at a commercial real estate company. An experienced funds manager should be able to help you choose the best investments for your financial situation.