In a world of uncertainty, how do we protect the financial well-being of ourselves and our family?
Quality real estate as part of your asset management strategy is one answer. That is where the ultra-rich put their wealth, to preserve it and to hedge against inflation. But this is a strategy that most investors believe they can’t afford.
Property management adds an additional layer of difficulty for some investors, who don’t have the knowledge nor the time to oversee tenants or the long-term maintenance of the properties that could be thousands of miles away.
But a deeper understanding of the benefits of adding real estate to your portfolio and how to successfully navigate those perceived roadblocks of expense and management can make adding real estate to a portfolio comfortably within reach.
The stability of real estate investment comes into clear view when you study the trends.
First: Appreciation over time
According to a news report, the average cost of a house in the United States 80 years ago was about $3,000. Four decades later, the same house would sell for almost $50,000. By 2020, a comparable house sells for around $200,000.
Considering those numbers, it is clear to see that an investment into real estate will grow your money over time, preserving capital and standing strong against inflation.
Second: Population continues to grow
The United Nations reports that 68% of the world’s population is expected to reside in urban zones by 2050, and as that happens, city prices will rise – the simple logic of supply and demand. Furthermore, according to a study by New York-based McKinsey & Company, a global management consulting firm, new jobs are outpacing the population in 48 cities in Europe. That statistic indicates that as those jobs attract more people, housing prices will continue to rise, making them more inviting for investors who are looking to grow wealth.
In the United States, Miami is one of the fastest growing cities in population, growing 78% since 1950. Similar patterns have happened in Madrid, Spain, where the population has grown from 1.7 million in 1950 to over 6.6 million by 2022, according to the World Population Review.
The review also reports that other areas around the world are showing the same trends in population from 1950 to 2020 including:
The trends are clear and asset appreciation is well established - So how do investors address those stumbling blocks that frustrate real estate investment as a part of your portfolio?
New Fin-Prop-Tech companies use securitization vehicles to hold properties, then issue notes that can be bought the same way as bonds and shares. The practice allows for fractional investment, inside the protection of the banking system, and it is easily transferable greatly reducing the traditional costs of a property transfer.
Fintechs like Estating use this strategy to open the access to property investment direct from the investor’s managed brokerage account. It opens the door to investing in real estate for all, significantly allowing the diversification of asset classes within their portfolios.
This is especially important in times of stock market fluctuations, such as the plunges which have been seen in much of the world over the last year. Because of that, uncorrelated assets, or investments that are not related to stocks, are a must. But choice is limited and options such as cryptocurrency, gold and art carry high risks. This is not the case with real estate.
Thirty years ago, one could get a 7% portfolio return practically just by investing on fixed income, without big risks. To get the same return today, a 17% risk is needed for the same return, and it can’t be achieved without being in the real estate sector.
Adding real estate investments to a portfolio improves its risk/reward profile and shifts what modern portfolio theory calls the efficient frontier. In London, for example, the FTSE has had a volatility of 20% for the last few years, with a return of 7.75%, according to the U.K.-based financial website ThisIsMoney.com. At the same time, the UK Land Registry, which compares the official price of the properties in London, had a volatility of just 5% and the same return as the stock market. A fourth of the risk, for the same mid-and long-term return.
The problem for investors, and their financial advisors, is that investing in property is too difficult and inflexible. It comes with obstacles of initial investment costs, legal fees and language barriers and is followed by the hassle of property management. And when it is used, it is restricted to one or two complete units in the same country, concentrating the risk and exposure and secured outside the advantages of their brokerage account.
However, with the help of a financial technology company, these barriers are removed. Such companies can take on the responsibility of sourcing and due diligence and securitize the properties into fractions allowing the investor and their advisor to pick the properties in the combinations that reflect the diversification strategy that best suits his or her needs.
The process allows the investor to take the value of ownership and reap the benefits of real estate diversification in their investment portfolio, while the service company handles the tedious responsibility of the tenants and maintenance to secure long-term value.
While at one time the diversification of a portfolio with real estate investments was out of reach for many, Fintech advancements have enabled a future in digital real estate diversification that can be taken advantage of by anyone, equalizing the game across the board.
As investors of all financial strengths and wealth classes search to create that safe haven for wealth, producing a positive cash flow and offering the best hedge against inflation, they now have the opportunity to look to real estate as a way to reach those goals.