The above chart depicts the stock market cycles from the early 1990s to about 2016. Very evident that stock prices rise and fall and rise again over time.
The chart above depicts Commercial Real Estate values and also shows that prices are cyclical, rising and falling and ultimately rising again forming a long term upward trend.
What happens to your investment, however, during the long term hold is the key difference in understand the benefits to owning real estate. Many Wall Street experts talk about buying and holding for the long haul and simply dollar cost averaging in a downturn. Lets think about that. (Just an example) Examining a $500,000 stock retirement portfolio with an average $500/week contribution over a stock market pullback of 8 years (see stock chart above) would cut the value of the stock holdings virtually in half. A real estate portfolio would likely see a similar decline in value.
With dollar cost averaging in stocks, you could add positions that would grow with the recovery..however, in our example, an investor would be adding only .001 or 1/10th of 1% to the total portfolio (weekly) by dollar cost averaging $500.00/week to a $500,000 total portfolio. So how exciting is the dollar cost averaging to the total loss in value over that time? A $500,000 portfolio didn’t spit off returns at all (unless invested in dividend paying stocks). And more importantly, the money invested is simply recovering its value and not actually working for the investor (for 8 years).
By contrast, a $500,000 real estate portfolio would have dropped in value by a similar percentage and you can’t easily dollar cost average on a weekly basis. HOWEVER, if you purchased with leverage, your tenants are likely still paying your mortgage and adding equity to your position without you adding a single dime. Additionally, If you had a property that created a positive cashflow, you’d have received a monthly or quarterly sum for the same 8 years.
Simply put, and at a minimum, it seems to make sense to purchase real estate as a diversification from the one asset that most investors have relied on … Wall Street and the Stock Market. and it’s not as difficult to get started as one might think. Find a reputable private equity firm and do some due diligence on their team, philosophy, track record, and direction.