Everything seems to be going virtual these days from artwork (hello, NFTs) to gaming but nothing beats good old bricks and mortar. We all need shelter and for that, real estate will always exist.
Real estate is not just for the hustlers and the Grant Cardoneâs of the world. Theyâre for the plain and simple, too. They offer a way of diversifying your money away from the stock market because as we all know, too many eggs in one basket is bad news.
When stock market crashes come around (like the one we’re experiencing), the value of our holdings fall in value (some plummet), this would make any sane person feel hella anxious. And rightfully so! But what do we do? Well, many might resort to doing the worst thing ever – selling! Here’s the thing, you only make an (actual) loss when you actually sell – at a loss. But if your holdings have fallen in value, guess what, you’ve not actually lost a dime, until you click that sell button.
It’s Real; And Slow
With real estate, the bricks and mortar will be there tomorrow. And the day after. And the day after that. You get the picture. Not like some other things (ahem, Russian stocks) that are there one minute and vanish the other. And since property is extremely slow to buy and sell, when it falls in value you donât even get the option to sell in that instant. Thank heavens for that!
Since the whole buying/selling process is rather clunky and dragged out (unlike stock market land where you can buy/sell in seconds) it takes time for crashes to filter through the market. And this means less volatility. And less volatility means less crazy highs and lows. Talk to anyone who’s tried to buy/sell their property (covid put this market on steroids) and hear their frustration at how slow it all is. But I guess this slowness kinda works to our advantages during times like these.
And thatâs the beauty of owning physical assets like houses. Sure, their prices could badly crash (like they did in â08) but you’d still be holding the physical stuff. As Stephen Schwarzman (aka king of real estate) likes to put it: âreal estate will bounce back. It always does”. And he’s right. It’s a matter of when, not if. And right now, with all these dark clouds hanging over markets like a thick veil that doesn’t seem to want to lift, take comfort in the fact that property ain’t going nowhere.
Opposites Attract!
When it comes to investing, you want to own assets that are not positively correlated with each other. If that were the case, all your assets would go down (and up) together. This is real bad news because when it comes to market crashes, youâd lose money on all your assets, across the board. There’d be nowhere to hide. Though it seems right now that everything is falling in value! But note how some are falling way more than others.
Real estate is known to be not all that correlated with the stock market. This is useful: when stocks go down (like they’re doing now), the value of your property (or its rent) will hopefully be going up. The great thing about real estate is that itâs also a hedge against inflation (what weâre seeing now) so owning a piece of it can help preserve your wealth to stop it from being snatched away. Read here what else you can do to protect your money from inflation.
So, when building your portfolio you’ve gotta branch out. Don’t stick to the same (like-minded) investments. Venture out into different areas (like property) to give your portfolio an edge. It’s like this: imagine if all your friends were the same. Boring. Unexciting. Same thing with your portfolio. It’d do way better if it had all sorts of company. And real estate can be the perfect friend (for your portfolio, that is).
It’s For Everyone
Many people think that getting into real estate is only for the ultra-rich but thatâs not true. You can start small. The beauty of real estate is leverage. Say a property costs ÂŁ100k and you put up a 10% deposit of ÂŁ10k. Next year, thanks to house-price growth, your pad is now worth ÂŁ150k, well youâre now sitting on a ÂŁ150k asset when in reality youâve only put up ÂŁ10k. That’s because you’re entitled to the gains from the whole thing.
Whatâs great about real estate is that you receive income (rent) as though you owned the entire property, regardless of your equity. So if you bought an apartment for ÂŁ100k that pays ÂŁ12k per year in rent but you only put ÂŁ10k in equity (and took a ÂŁ90k mortgage), youâd still receive the ÂŁ12k each year. After the first year, the rent you receive will have already exceeded the deposit you put down. Pretty cool.
With purchasing your very own property to rent out, itâs crucial that itâs not too far away from your permanent residence. I wouldnât go farther than a 40min ride away. When it comes to looking after your tenants, all sorts of things will crop up from boilers to water leaks. So be prepared, and be nearby!
Oh, and make sure that you have enough cash on hand. Especially if you’ve got mortgage payments to make it’s crucial that your emergency fund is big enough. Read here how you can build your emergency fund and why it’s so important. You need cash on hand for all sorts of funny things that might crop up. You can never be too prepared.
REITs Are Real Cool Too
While rents will give you another stream of income outside of your 9-to-5, saving up for a deposit for your primary resident will most likely be your number one priority. So, saving up for a deposit for your dream Buy-To-Let (BTL) probably isnât on your radar right now, nor should it be. Instead, turning to Real Estate Investment trusts (known as REITs) is your best bet.
These are companies that are listed on the stock exchange who invest in real estate from commercial (offices, warehouses, retail parks) to residential (apartments, houses, social housing)property. Investment trusts can take on debt (known as gearing) to boost returns. During the pandemic, when your average real estate turned sour, many REITs loaded up on debt to take advantage of market downturns. This ability has meant that several REITs have done pretty well this past year.
Why REITs?
REITs also pay out around 90% of their taxable income as dividends which is great if youâre looking for some passive income streams, but these are not so great if youâre looking to grow your capital. As such, REITs wonât be able to 10x your money. For that, turn to crypto! But they’re certainly stable. And who doesn’t want a bit of that? Especially now.
REITs (when added to a tax wrapper like an ISA or Sipp) will allow you to enjoy the ârentâ tax-free. Sounds nice, doesnât it? But, since theyâre listed on a stock exchange, they will be somewhat more correlated to the ebbs and flows of the market. But these nifty structures will allow you to invest in property minus the hassle of management (tenants can be a real pain) and the costly effort of putting up a deposit!
Numbers Talk
Letâs take the past 20 years as our benchmark. Over that period, real estate has outperformed the market with London property outshining them all. No wonder everyone seems to love real estate! But hereâs the thing, weâve not had a property crash in years. So I guess we shouldn’t take any future returns for granted!
This reminds me of a family friend of ours who got badly burned in the stock market so they turned to real estate, instead. And they adore it. They said how itâs done so much better than any stock they’ve ever owned. I hope for their sake that a property crash doesnât come to say hello!
In the UK alone, average house prices rose by 13% in the year to June 2020 over the year to June 2021 which is the highest yearly growth us lot have seen since 2004. Welsh folk had the best time with house price growth of 16.7% this year. Oh, incase you were wondering, England rise by 13.3%. Still pretty good. And now? The average house in the UK stands at ÂŁ278k! Madness or what.
Whether you’re looking to buy your very first buy-to-let property (squeal!) or wanting to diversify your portfolio and offer it a little protection (from inflation), real estate is a great place to start. This is why I’ve got around 25% of my portfolio stashed in this asset class (no, not in houses. I wish), in REITs.
So dig around. There’s something in there for everyone, no matter what stage of life you’re at.
Disclaimer: This blog is not investment or financial advice. It is my opinion only. This blog is not a personal recommendation to buy/sell any security, or to adopt any such investment strategy. Always do your own research before you commit to any investment.
Knead Your Dough 