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The Super Wealthy Are Investing in Real Estate, and You Should Too

The stock market can be a tricky thing at times. One minute it’s up, next minute it’s down. For much of the first half of 2018, the stock market was in what’s known as a bull market – where investors are buying up stocks, and companies are seeing their prices skyrocket.

In the last few months, though, that has begun to change. October was especially rough for the stock market, and while a nice chunk of corporations reported higher-than-expected earnings in mid-October, the markets are still in decline.

By mid-November, the stock markets took another hit. The Dow Jones Industrial Average dropped 400 points on Monday, November 19, while the Nasdaq dropped 3%. Tech giants and earnings powerhouses Amazon, Facebook, Netflix and Apple all took a hit recently as well.

Financial firm Morgan Stanley says the bull market is already over, according to a CNN Business report, and 40% of the S&P 500 is already in a bear market. Stocks are falling, and more bad news is on the horizon, experts warn.

Savvy investors and ultra-wealthy investors are heeding the call to sell off stocks and shift their money elsewhere. So where is that money going? According to a CNBC report, ultra-wealthy investors are putting their money in real estate and private equity.

Michael Sonnenfeldt, the founder of investment club Tiger 21, said real estate is accounting for 28% of its members’ allocations. Tiger 21’s more than 600 members are entrepreneurs from every industry, with about $60 billion in total assets.

As Sonnenfeldt said during an appearance on CNBC’s “Power Lunch” recently:  “You want to be defensive, but in a low-risk environment you still have to take risk. So you are going to take risk where you have expertise: owning buildings, building small businesses.”

Some may question why real estate would be a good investment in a down market. The initial hesitation comes in large part from what happened during the last large bear market almost 10 years ago. During the financial crisis from 2007 to 2009, when the S&P 500 stock index fell 57%, residential real estate took a huge hit, too, losing 18%. While comparatively real estate was less of a loss than the S&P 500 stocks, down 18% is hardly a good investment.

Why, then, are the ultra-wealthy turning to real estate in today’s bear market when they don’t have confidence in stocks? It’s because, according to a USA Today report, the Great Recession was the exception and not the rule when it comes to down markets and the effect on real estate.

Mark Hulbert, the founder of the Hulbert Financial Digest, wrote the report for USA Today, and looked back at the last 19 bear markets since 1952. What he found was that other than from 2007 and 2009, the real estate market showed increases in all but one bear market. The one bear market that didn’t show increases fell by just 0.4%.

Hulbert’s findings were based on the Case-Shiller index. The brightest part of the report for real estate investors is that even including the Great Recession, the Case-Shiller index showed an annualized average increase of 4.6% for all stock bear markets since 1950.

There is even more good news, according to Hulbert’s report. He quotes Gray Cardiff, the editor of the Sound Advice newsletter, who said that relative to stocks, real estate is undervalued today. When compared strictly to stocks, Cardiff says real estate has rarely been cheaper, and he compared data all the way back to 1896.

Cardiff says the last time the ratio of real estate-to-stock value was higher than today was during the Internet bubble. In the bear market that followed, the S&P 500 lost almost 50%, while the Case-Shiller home price index rose more than 20%.

Ultra-wealthy investors don’t always end up being right when they make their decisions on where to place their money. However, one thing this group of people often does is base their investment decisions on sound research and historical facts and figures. The historical success of real estate in a down market is what is driving these investors’ decisions to shift their money away from what they, and experts, believe is a bear stock market and into real estate and private equity. As Sonnenfeldt said, even in environments that are low risk, investors still need to take a risk to make money.

Real estate investing isn’t reserved for just the ultra-wealthy, though. There are entry points at various levels, and you don’t have to have a net worth north of $1 billion to get into the market.

Now may be the perfect time to jump into real estate investing. Interest rates are continuing to rise, which often results in fewer buyers on the market. These higher interest rates result in larger monthly mortgage payments, which often means that what one could afford a year ago is drastically different than what they can afford today. For patient investors, though, this could be a good thing.

As interest rates rise and buyers fall, so, too, do the price of homes. Homeowners who need to sell may be forced to lower the asking price of their homes due to the fact that there aren’t as many buyers around. This provides an opportunity to get even more value on a property than an investor could before.

During times of higher interest rates, more people turn to the rental market to bide their time, hoping that interest rates come back down again, or that they are able to put aside more money for a larger down payment later. The housing market has already begun to slow, since it is what is considered a “credit-sensitive” part of the economy. The same downturns are being seen in similar segments of the economy such as autos.

This slowing of the market actually provides real estate investors a terrific opportunity to capitalize by purchasing a home at a price that would have been under market value less than a year ago, and then earn monthly income by renting the home.

Take it from the ultra-wealthy: Real estate is a good option in a bear stock market.

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