As well as your garden variety stocks and bonds, a balanced investment portfolio may well include “alternative investments”. These often higher-risk (but potentially higher-reward) investments include cryptocurrencies, art, and venture capital.
But one group of alternative investments that has both a real-world utility and, compared to others, comparatively low risk, is real estate.
Property investments tend to be considered more “slow and stable” because apartments and office blocks aren’t directly traded on an exchange (even if big property-owning companies can be). This helps insulate real estate from daily swings in value, which may be especially valuable in a downturn.
1. Why invest in real estate?
2:17 min read
With the dramatic rises and falls of cryptocurrencies dominating investors’ attention in 2021 so far, opportunities in real estate have, relatively, perhaps flown under the radar.
Real estate offers a combination of potential price appreciation, regular income, and security. The latter point’s important: the price of a multifamily housing unit might take a tumble if Elon Musk tweets something unsavory about it (however unlikely that is), but its value probably won’t go to zero. It’s an asset with both utility and the potential to generate a stream of cash flows, after all.
The Vanguard Real Estate ETF (VNQ), for example, has returned 9% annually since September 2004. And in the last decade, it’s up 60% versus the 215% rise of the all-important S&P 500 Index.
Normalized performance: VNQ in blue, S&P 500 in pink (Source: Bloomberg)
This broadly diversified real estate exchange-traded fund has underperformed the US stock market (after fees and expenses) over the last ten years, sure, but it doesn’t mean it’s not worth exploring real estate investments. In fact, if you manage to get into the right deals, your real estate portfolio could do significantly better than the market.
How real estate fits into a balanced portfolio
A typical investor might have most of their assets in stocks, bonds, and maybe the house they live in. And beyond the share of real estate stocks in a broad, passive market-tracking portfolio, they’re unlikely to have any property investments of note.
But well-heeled “accredited investors” – that is, those with annual income over $200,000 or a net worth in excess of $1 million – tend to invest differently. They tend to have at least a quarter of their portfolio invested in real estate, which might be thanks to the access their accredited status gives them to deals usually reserved for institutional investors.
Accredited investor typical portfolio allocation (Source: Diversyfund)
Investing in real estate
When thinking about real estate investing, a typical investor might first think of buying residential real estate to let out to tenants or refurbish and sell at a profit. They might also think about buying into real estate investment trusts (REITs).
But if you’re an accredited investor, chances are you’re thinking much bigger: as well as direct and stock market real estate investing, you’ve also got access to individual commercial real estate deals, and private funds.
Whatever your flavor, suffice to say investing in real estate isn’t monolithic. The sector itself houses subsectors like hospitality, retail, storage, and offices – all with their own dynamics and wide-ranging investment opportunities. .And there are geographical factors at play too. Within the US, for instance, local supply and demand dynamics affect the price, performance, and growth potential of individual assets across cities and states.
2. Four top real estate investing opportunities
2:20 min read
The US real estate market had a stormy 2020, but it’s markedly different in 2021. Stock markets have hit fresh highs. More and more of the US population is vaccinated against coronavirus, setting the scene for a cycle of recovery.
Analysts reckon the recovery in 2021 will focus on a return to normalcy. However, a lot of things mightn’t feel normal for years to come.
That’s true of the real estate market too, creating attractive investment opportunities. So we’ve teamed up with online real estate investing platform Crowdstreet to highlight four real estate sub-sectors that might be worth investing in this year.
1. Hospitality (i.e. hotels)
Hospitality and leisure was hit hard by the pandemic, but now that a growing proportion of the US population is vaccinated, a recovery is already underway.
Commercial real estate data platform STR’s weekly US RevPAR index, which tracks the revenue per available room (RevPAR), was $35.72 in January 2021. By the week of April 10th, it had surged 87% to $66.99, the highest reading in more than a year. And according to the Transportation Security Administration, the daily throughput of travelers has also skyrocketed.
The hospitality and leisure industry has ramped up hiring to meet the anticipated hike in summer demand. Of the 916,000 jobs added in March 2021, for instance, about 30% were in the hospitality sector. However, at the operating level, a full recovery is likely still months, if not years, away.
Opportunity: Analysts reckon bargain hunters can still get a 10-15% discount to 2019 pricing, which is attractive considering the potential demand explosion that’s likely to come.
Geographically, the most attractive opportunities are in tourist hotspots, suggesting the best-performing hotels pre-pandemic are likely to benefit most from the recovery. These include Miami, Washington, D.C, New York City, and San Francisco.
The pandemic was a boon for remote working, with several companies announcing indefinite remote work for some or all employees.
On the one hand, that’s clearly reduced the need for office space. But on the other hand, those employees who do return to the office will demand more space around them in order to feel safe – likely spelling the end of densely packed office spaces.
Opportunity: Since the cost of office occupancy is a major consideration for employers, seeking cheaper office space in the suburbs could be a key way they offer more space per employee in a cost-effective way.
The shift to suburban offices will likely be prevalent in large cities with expensive urban office space. There, investors should expect the office sector to experience short-term pressures. But for a city’s so-called “trophy assets”, any knee-jerk drops in valuation could create a buying opportunity.
Some of the strongest-looking office real estate markets in the US include Austin, Texas, Raleigh-Durham, North Carolina, Nashville, Tennessee, and Salt Lake City, Utah.
3. 🏡 Get The Full Report From Crowdstreet
Less than 1 min read
The Definitive Guide to Real Estate Investing by Crowdstreet has even more detail on the investment opportunities outlined here – and covers five other sub-sectors including industrial and multifamily.
Get the full report direct from Crowdstreet
4. Four top real estate investing opportunities (cont.)
1:18 min read
Brick-and-mortar retail suffered almost as badly as the hospitality sector during the pandemic. While the hospitality sector is expected to come roaring back, it’s not quite as straightforward for retail: some parts will bounce back as others languish.
In fact, the name of the game in retail will probably be consolidation: the best-located shopping centers should recover, aided by retailers that have survived the pandemic and are keen to upgrade their locations.
As a result, poorly-located shopping locations may fall by the wayside, itself creating another opportunity: the best use of their real estate could be to redevelop them into self-storage, residential, or last-mile distribution centers.
Opportunity: The grocery-anchored shopping centers offer the best investment opportunities in the retail space: they’re likely to be the shopping hubs retailers and consumers alike rally around – as well as previously prime locations, even if they’re not grocery-focused. And they’re most attractive in Austin, Charlotte and Raleigh-Durham, North Carolina, and Nashville at present.
4. Student housing
Few investors pay close attention to student housing markets and therein may lie the opportunity.
Schools all over the US shut down in March 2020. But by September, some schools unexpectedly witnessed record enrollments, shedding a bright and early light on who the most likely winners are going to be in this space.
Opportunity: The best-capitalized and most desirable universities will continue to attract students in record numbers, which will, in turn, propel local student housing markets. And with location supercritical to students, properties near or adjacent to college campuses will likely outperform even more strongly.
5. How to invest in real estate
1:32 min read
There are a few things you need to do to take advantage of these US real estate opportunities.
First, decide how much you want to allocate to the real estate sector. If you’re an accredited investor, this might be about a quarter of your portfolio – but if you’re not, you’re likely looking at investing a much smaller proportion.
Then, decide how you want to invest. Again, accredited investors will have access to private funds or vehicles, or can even assess opportunities on a deal-by-deal basis. Non-accredited investors might have to settle for direct property purchases, REITs, or new property crowdfunding or lending platforms.
Third, develop your investment thesis. You might want to do further research into the opportunities mentioned earlier, those highlighted in the rest of [the guide], or you may already have something in mind.
Once you’ve done that, it’s time to pull the trigger. When it comes to choosing a platform, accredited investors will likely want a platform that has a proven track record of finding deals that deliver strong risk-adjusted returns. The ideal platform would probably also allow you to review, compare, and choose the deals that you find most attractive.
And there you have it. A guide to real estate investing opportunities that highlights key opportunities in the US which may, over time, help deliver you positive risk-adjusted investment returns.
Of course, when investing, your capital is at risk and isn’t guaranteed to make a profit: the value of your investments can go down as well as up.
This guide was produced in partnership with Crowdstreet.
Crowdstreet’s online commercial real estate investing platform offers accredited investors access to funds and vehicles, tailored portfolios, and individual deals.
See live deals and make an investment decision right now
Read part two – How Investors Are Playing Commercial Real Estate – now.