This post is was originally published on Investor Junkie
By: Guest Author Updated: September 28, 2017
(Editor’s Note: This guest post was contributed by Fundrise, one of the real estate investment platforms that we’ve reviewed at Investor Junkie. Click here for a detailed comparison of Fundrise and other services.)
Are you like most investors out there still following Modern Portfolio Theory? You know, the theory that says your investment portfolio should be a balance between stocks and bonds, with your allocation shifting away from stocks and more toward bonds as you age?
If this describes you, chances are you haven’t put a lot of thought into why you’re still following this old rule of thumb. Who ever said you should be invested only in stocks and bonds?
Average Dividend Yield 2008–2016
More and more, savvy investors are actively adding real estate to their portfolios. Major institutions keep 20%+ of their portfolios invested in alternative investments like real estate. The historical returns have proven this to be a prudent strategy. However, due to regulations and high minimums, it’s the individual investors like you who have been cut out of the deal.
That is, until technology changed the game. For the first time, platforms like Fundrise are allowing individual investors to access the private markets and diversify into high-value asset classes like real estate.
Real Estate vs. Inflation 1965–2016
Why Is Real Estate a High-Value Asset Class?
Real estate as an investment has been a top performing asset class for decades. This is because it can provide both consistent income from rents and the potential for long-term appreciation. Real estate also benefits from its inherent scarcity. As Mark Twain once said, “Buy land, they aren’t making it anymore.”
As cities grow, the demand for real estate goes up as more people need more places to live, work, eat and shop. This is why real estate has gone up in value over time. And it creates wealth for the people who own it and invest in it.
There is potential for strong returns through real estate investing. Sadly, most people haven’t been able to tap into this high-value asset class. Only major institutions and the wealthy elite have historically been able to benefit.
The Old Way of Investing in Real Estate
Until recently, there have been three main ways to invest in real estate: private equity funds, real estate investment trusts (REITs), and individual investment properties. But most of these options are capital intensive, prohibitively expensive, and closed off to individual investors. Also, buying property directly requires a lot of industry knowledge. It’s for these reasons that investors generally opt for publicly traded REITs if they want to add real estate to their portfolio. But this option also has its drawbacks.
REITs are pools of real estate traded freely on a stock exchange. This lets people buy and sell as they wish. Of course REIT prices are set in the public markets. So they often trade at a significant premium to the true underlying value of the assets they hold.
On the upside, public REIT shares do offer investors the benefit of liquidity, the ability to easily buy and sell. But while liquidity is nice, this benefit comes at a cost. In fact, the ability to liquidate your shares can cost roughly 20%–30% of the price you pay upfront. That takes a sizeable chunk out of your potential returns. Of course if you need access to funds at will, this trade-off may be worth it. But if you’re looking to invest for the long term, do you even need this liquidity you’re paying so much for?
It’s also important to keep in mind that publicly traded REITs tend to be highly correlated to the broader stock market. This means that REIT prices can go up and down with corporate stocks, regardless of whether the underlying values of the properties within the REIT have changed. The high correlation of REITs and the stock market reduces portfolio diversification, increases beta risk, and potentially lowers risk-adjusted portfolio returns in the long term.
The New Way of Investing in Real Estate
With all the downsides to investing in real estate through public REITs, it’s no wonder that technology and new regulations are being leveraged to give individual investors brand new options for real estate investing — options that bypass the public markets entirely.
Today there is a new, cost-effective way to invest in private real estate. Investors can access direct, private real estate investment opportunities regardless of net worth through Fundrise. When you invest with Fundrise, similar to a public REIT, your money is automatically diversified across many real estate properties. This helps you boost your current income, maximize long-term appreciation or both. However, unlike publicly traded REITs, our private eREITs provide the investor with the opportunity to earn potentially higher returns at reduced price volatility. Studies show that investing in the private market can produce 30%–40% higher returns than investing in the public market.
Now historical obstacles, such as high fees and high minimum investments, are no longer barriers to entry for private real estate investing. The potential benefits from adding private real estate exposure to your portfolio are available to almost everyone. Doing so can save you the liquidity cost imbedded in public REITs and help you maximize your potential returns.
Past performance is no guarantee of future results. Any historical returns, expected returns or probability projections may not reflect actual future performance. All securities involve risk and may result in partial or total loss. While the data we use from third parties is believed to be reliable, we cannot ensure the accuracy or completeness of data provided by investors or other third parties. Neither Fundrise nor any of its affiliates provide tax advice and do not represent in any manner that the outcomes described herein will result in any particular tax consequence. Prospective investors should confer with their personal tax advisors regarding the tax consequences based on their particular circumstances. Neither Fundrise nor any of its affiliates assume responsibility for the tax consequences for any investor of any investment. The publicly filed offering circulars of the issuers sponsored by Rise Companies Corp., not all of which may be currently qualified by the Securities and Exchange Commission, may be found at fundrise.com/oc.