By: Don Ganguly, CEO, HomeUnion
As the markets take a tumble, many have emotional reactions that border on fear or outright panic. Panic ensues when we have put too much of our nest egg into the stock basket and have a financial requirement coming up in the short term. Good financial practice divides portfolios into three different buckets: (a) a safe bucket that ensures asset preservation in tumultuous times which includes Treasuries and cash; (b) an allocation that grows the asset over time which includes stocks generally, and (c) a bucket that provides income on a regular basis which includes dividend-yielding stocks, bonds, and annuities that are essential for investors, particularly retirees.
Real estate, when carefully vetted and soundly operated, can be a magic bullet and fulfill the requirements of all three portfolio buckets. As a hedge against volatility, single-family rental properties have proven to be uncorrelated with swings in the stock market over the past several decades. Furthermore, selected assets can be repositioned during their lifecycle to meet each individual’s needs. For example, stable neighborhoods in markets that are insulated from wild swings in the economy can be considered part of this safety bucket. Assets in these neighborhoods generally offer consistent and modest appreciation over the long term. When leveraged, the asset will slowly appreciate while proceeds from rents lower the debt obligation for the investor.
The second, riskier bucket that investors generally target is high-return investments. These single-family homes generally fall into areas where appreciation trends have been pronounced, such as markets where population growth is booming or barriers to entry are low. With proper neighborhood selection in these high-growth markets, investors could gain amplified returns. The risk to invested capital in these areas can be more substantial in the near term, though rapid appreciation can compound returns while owners collect rent.
Rent ties both of the previous buckets together and serves as a consistent source of income, which fulfills the final bucket. Rent helps landlords pay down debt or enjoy stable income monthly and through retirement. During the Great Recession, which was largely attributed to the housing market, the S&P 500 dropped by approximately 50 percent. Rent fell 8 percent. Both investment vehicles eventually recovered, but single-family properties continued to pay dividends through the downturn.
The key to investing in real estate is having solid data and a steady and stable performance of the various real estate areas. At HomeUnion, we rank all neighborhoods in the country by risk and return across the various classes of real estate, by applying the same detailed analyses as equity research analysts do on stocks. As a result, investors can make intelligent choices that match their particular goals and get a break from the roller coaster ride of the stock market.