All eyes have been on the stock market as things have been going quite well. So well, in fact, that talks about when a correction could be coming have been more and more frequent. [In fact, as I write this article the DOW is seeing a nearly 300 point drop in response to the perception that it has hit its peak]. Or maybe there won’t be a correction and they should continue riding the wave. The question arises though, what does this mean for the Real Estate market? Then you realize that the Real Estate market has also been hitting an all-time high. How do these two factors play with each other and what are the professionals saying?
Before moving to what institutional investors are doing, it is important to understand that the stock and Real Estate markets both have their positives and negatives when it comes to investing (as most already know). The stock market is great due to the fact that it is mostly liquid, flexible, diversifiable, and can be reallocated into retirement accounts. They also tend to be emotional, volatile investments where bankruptcy could completely empty out your accounts. The Real Estate market on the other hand allows for tax deductions, depreciation, and the 1031 exchange which can grow your net worth while avoiding capital gains tax. Unfortunately they are also illiquid, difficult to diversify, while including things like taxes and fees. With all of this being used as a rule of thumb, how are people reacting to the thought that the stock and Real Estate markets are rounding the peak in their cycles?
Interestingly enough, given the volatility of the stock market coupled with the assumption that it is reaching a peak, institutional investors seem to be moving towards Real Estate investing. Why Real Estate though? The Real Estate market uses debt financing in order to finance the investment with a 20% down payment (as low as 3% on a personal property). It is important to mention that this market uses debt financing because we are able to look at the debt funds raised in order to see how these investors may be trending. What is astonishing is that, in 2017, private debt funds raised $107 billion which is a record high. So far in 2018 that number continues to be historically high. Private debt can be used in a number of different ways but Real Estate, both commercial and residential, seems to be one of the main areas that this is going. This is believed to be because prices are at historical highs and have the tax benefits that make it a very valuable asset. Commercial Real Estate in particular is being valued highly by institutional investors because of the fixed-income / returns that can be had when holding these assets long-term. It can be seen as a great way to balance risk and returns while offering some cash flow.
Of course all We have added an interesting chart below that can be referenced for your own investing. It details the value over time when returns are expected at 10% and 4%, the historical averages in the stock market and Real Estate. This means that $10,000 is invested into the S&P 500 and $10,000 as the 3% down payment on a property.