Diversifying With Real Estate
Offering high returns and passive income is not the only reason investing in real estate is good for your portfolio, although those are pretty good reasons by themselves. Financial advisors are always telling you to diversify and I’m sure everybody who reads this blog has heard it once before. They tell you to own shares in different companies and different industries and different countries too.
The purpose of this diversification is so that if some of your investments were to take a turn for the worse your others would likely be experiencing different trends. This allows your portfolio to avoid to large peaks and troughs of the raw business cycle. And this makes sense, who wants to place all of their eggs in one basket? (well gamblers might, but we’ll just assume you don’t gamble with your retirement plan).
Real estate allows you to have investments that aren’t tied to the stock market and yet can still earn high returns, unlike bonds or other guaranteed investment vehicles. Although you can argue that there is some correlation between the stock market and real estate prices, the fact is that the relationship is small. Even if real estate prices fell every time the index fell, because of how much slower the real estate market is you will have a much longer time to react to the changes.
At the core real estate prices are based on the supply and demand of housing (here is some basic economics for you), thats the reason why a 900 square foot apartment in one city can cost 3 times as much in another city.
The demand is how many people want housing, so if a lot of people are moving to a city the demand will be high. If there are a lot of people moving away, the demand will be lower. The supply is based on how much housing is available, so if a lot of new condos were just built there is more supply then if no new buildings were constructed this year. So if there is a lot of demand and not a lot of supply prices are going to be higher.
Do you know anyone who moved to a new city/bought a new house/sold a house based on what the stock market did? I don’t, that alone shows how the 2 markets are driven be different factors. So next time somebody tells you to diversify your investments think about real estate.