I am typing this at 9:20 am on Jan 24th and the DJIA is down 1,084 points. I am sending and receiving texts with people worrying, crying, asking if it’s because of the supply chain, inflation, Russia and Ukraine, when will it end and go back up, and don’t even get me started on what the text threads look like with my crypto buddies.
All this made me think about why real estate is great. There are three good reasons I like real estate as an investment and even more so right now.
- Leveraged: this is just fancy investor speak for, “you borrowed money from someone else.” What’s amazing about real estate is that a vast majority of the time you borrow a bank’s money for the investment (sometimes a lot of it), but they don’t take an equity stake. Equity stake is just a fancy investor way of saying, “when I sell it, I keep 100% of the profit.” They give you most of the money but when you sell you keep all the profit? Yup. Pretty cool, right?
- Illiquid: this is just a fancy pants way of saying, “it’s hard to sell.” You might think, “I’ve heard we want liquid assets so we have flexibility?” While that can be very true depending on your possible use for the cash, one of the reasons real estate usually works as an investment is this: IT’S HARD TO SELL. You can’t just bail when things get sideways, when it has a bad week, month, or even year. The crypto guys I know (most of them) are salivating at the 50% drop of late. They’re seeing this as a time to buy back in at a low price. Why? Because they see this as a long term investment. They’re planning on holding these for a LONG time. However, a few I talk to are freaking out because, i mean, it’s pretty rough to see your 401k turn into a 201k.
- Inflationary Hedge: Normally real estate is considered a good inflationary hedge. Inflation just means “prices for things are going up.” So when you’re looking at a big ticket item, a percentage move up means a lot. So the prices for houses will be part of that inflation picture. Add on top you’re holding it in a levered basis, its a great return on investment.
Of course it’s more complex than, “real estate is great.” The biggest thing to consider is your timeline. It’s not great for everyone. It might not make sense based on your investment needs and a million other factors. Plus there are even more reasons than the three I highlighted for why it is great.
Maybe it’s just the “old man” in me, but something about a real asset, one I can touch and see and feel, has some intrinsic value. Yes, I might jump into the crypto space soon, especially with the dip it’s seen, but I don’t think I’ll be buying any digital art nft’s soon.
UPDATE: So the DJIA hit a low of down over 1,000 yesterday and furiously rallied back to actually close in positive territory. Then started out this morning (Jan 25th), it’s going back down. Maybe next month I can talk about volatility. This doesn’t change any of the above and the fact that we’re in a skittish stock market, geo-political concerns, inflationary pressures, and all of this adds up to a flight to quality. Historically, real estate has been considered a good “safe haven” for dollars when you need to move somewhere stable and safe (2008-2010 is considered by most, and history, to be an outlier). So buckle up, enjoy the ride, and for the long term, on a levered basis, real estate is almost always a great investment.