As a new quarter begins and you continue working toward a stable and income-producing portfolio that offers the amount of control and returns you’re seeking, it’s time to explore how real estate investing can protect your assets from market volatility and inflation. Now is the optimal point to begin your review of strategies to recession-proof your portfolio through diversification and reallocation.
With experts and investors anticipating a downturn, it’s more important than ever to determine the best recession-resilient real estate investments and understand why multifamily residential assets are likely the best bet for your portfolio.
Real Estate As A Hedge Against Volatility And Inflation
If you’re looking for an investment vehicle that typically generates better-than-market returns, real estate is a broad asset class that acts as a buffer against economic fluctuations.
Following the recent 10-year market expansion, economists foresee increasing volatility, stable yet increasing inflation, and the rising cost of capital. Opinions vary widely in regard to the timing of the coming recession; however, experts predominantly predict that the record-long period of growth is showing signs of slowing.
When the next recession takes hold, real property will likely outperform securities in terms of return on investment (ROI), stability, control over value, appreciation, capital availability and revenue generation. Over the long term — though stable in recent years — inflation will erode the value of stocks, bonds and other low and fixed-return assets. As a contingency, it’s imperative to place capital in assets whose value isn’t solely tied to monetary policy, stock market or index oscillations.
Creating A Balanced Portfolio
Though I’m passionate regarding real estate as the best avenue to wealth generation, it’s wise to diversify your portfolio across asset classes, industries and geographic regions. A portfolio that includes holdings driven by a broader range of economic and social conditions results in reduced risk of loss if any particular sector or market experiences slowing growth or diminishing returns.
What’s the best mix of investments and how do you mitigate risk? The ideal balance in your portfolio is contingent primarily on your experience, tolerance for risk and desired rate of return. To help you determine your optimal mix, consider these tips for your diversification strategy:
• Look at where your primary market is headed: Can you tolerate across-the-board losses if the market contracts?
• If your holdings are allocated predominantly to any particular asset class, redistribute at least 60% to alternative investments. You’ll lose no more than 40% if your primary market or class crashes.
• Select assets that typically outperform the stock market’s average rate of return of 10%.
• Choose investments that can offer control over value and exit strategy.
• Identify assets that are compatible with your tolerance for risk.
Real Estate Investments That Resist Recession
Securities or real property? We prefer investments that won’t tank over a matter of consumer confidence. Further, we want long-term holdings that will enable us to build wealth now and through the next correction. We improve our chances of picking a winning project through comprehensive due diligence on the market and subject.
To determine the best recession-resilient real estate markets and investments for your portfolio:
1. Identify regional markets that exhibit strong economic growth factors.
2. Select a market with increasing sales and lease demand due to rising population, incomes, industry growth, etc.
3. Consider which class of real estate offers the greatest average ROI in your chosen market.
4. Weigh the potential risk, and evaluate cap rates between classes and subdivisions.
5. Evaluate the tax benefits associated with the different investment models within the commercial and residential niches.
Taken together, all the variants of real estate tend to perform well in holding their value — and in some instances appreciate — during a recessionary phase. However, multifamily gives investors a unique set of advantages.
Compared to securities, and even commercial or single-family residential, multifamily offers immense control over your ROI and insulation against the economic climate in the following ways:
• Ability to improve value by increasing net operating income (NOI).
• Vacancy risk and loss distributed across more units.
• Stable demand for housing compared to retail and commercial.
• Faster tenant turnover; more frequent releasing at higher rental rates.
• Control over operational expenses.
• Potential for ancillary revenue streams.
• Availability of financial leverage to fund acquisitions and improvements.
• Ability to scale up your portfolio more efficiently.
Riding The Crest
Diversifying your portfolio to include a healthy ratio of real property investments is a sound financial practice that yields stable returns amid growth or decline. Whether we’ve reached the crest or have already passed it, it’s evident that increasing volatility threatens the stability of the stock market and the returns it generates. Allocating a sensible share of your portfolio to multifamily investments allows you to optimize your holdings for positive NOI and profitable exit value in any economic environment.