Real Estate vs. Stocks and Bonds

Investors are primarily concerned with a return on their investment. The required return must be commensurate with the risk associated with said investment. Investors can thus compare different investments based on their risk profiles and associated yields. The riskier the investment the greater the required return.

Historically, stocks and bonds were the two major investment asset classes, but today real estate aggressively competes for investor dollars in the capital market. Commercial real estate has investment behavior attributes similar to both the bond and stock market. Contract leases are like bonds while the upside realized by re-tenanting and/or repositioning a property resembles stocks. As a result, the risk and returns associated with unleveraged, institutional commercial real estate generally fall between that of stocks and bonds.

Despite their similarities, real estate tends to be impacted by different economic events than stocks and bonds. Notably, real estate can be a sound investment during inflationary periods. Increases in market rents may occur more quickly than increases in operating expenses leading to a rise in net operating income. Demand for such assets places downward pressure on capitalization rates leading to an increase in value.

Because the returns for real estate are not highly correlated with that of stocks and bonds, it becomes a crucial part of any portfolio as a means of reducing overall risk.

I like real estate as an investment because at the end of the day it is real. You can touch it and it has intrinsic value. An investor can directly influence the performance of their investment through effective property/asset management, discretionary capital improvements, etc. Finally, real estate is the only investment class where obtaining and acting on information that is not publicly known is not only legal, it’s often the foundation of a good deal.

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