It is often the case that even sophisticated investors fail to include real estate within their normal investing strategy. Understandably focused on financial assets, many people make the mistake of not seeing real estate investing as a central part of a healthy, robust, diversified approach, instead misinterpreting “diversification” as literally a matter of balancing equities versus fixed income investments, with room for little else.
The truth is, quite simply, that if you are reading this you are probably already a real estate investor and, consciously or not, your real estate holdings are a strong complement to your market investments. And they could – and should – be stronger still.
First, it is necessary to think about what a truly complementary real estate investment portfolio should look like. Your existing real estate investments may include the house you live in, possibly a vacation property and/or one or two rental properties. You may have bought a house for your kids to help them on their way. These are all good investments, but this does not in itself truly constitute any kind of real estate investment strategy.
Real estate investing should be seen as a natural complement to market investing, and it should both be approached in a similar manner as well as ideally somewhat mimic the best qualities of market investments. Let’s start with diversification. Your market portfolio undoubtedly includes a wide variety of equities, possibly various mutual funds, exchange traded funds (ETFs) and fixed income funds. Some investors who are less wary of risk may also weave in commodities, and some dabble in foreign exchange investing or, these days, cryptocurrencies.
Most likely, at least part of your core investments will be tied up in a 401(k) and other purely financial sheltered vehicles.
Investors today fully understand the merits of this kind of diversified financial investing approach. Within our own families or those we know, we have all heard the stories of the relatives back in the day who worked for a company for 40 years and, stemming from misplaced loyalty or simply inertia, had everything from their stocks to their pensions to their gold watch tied wholly to that one company, only to have the company go bust or dwindle in value.
More recently, in fact just last year, the extraordinary story of Archegos Capital is a recent cautionary tale of what happens when investors place too many eggs in one basket. Archegos invested narrowly, and big, in a tiny number of media stocks, primarily ViacomCBS, Spotify and a handful of Chinese tech giants such as GSX Techedu, initially outperforming the market but without the breadth to survive the inevitable downturns, ultimately losing over $20 billion in two days and wreaking havoc in global markets for at least a month.1
Diversification is a lesson well learned, time and time again, throughout the history of finance.
Diversification can mean something different in real estate. First, real estate is itself an important element of diversification that complements any sophisticated portfolio. Second, how those investments take place should also complement a market investment approach. In other words, it is important to take real estate investing as seriously as traditional market investing. Working with a group of professional real estate investors, unlike relying on your own property or small number of properties in one location, provides that necessary level of discernment and diversification.
Real estate investments, like stocks, differ in quality just like equities. An investment in, say, multi-family properties or single-family residential developments in Ballard Global high-growth markets such as Austin and Miami will generate a far greater yield than a similar property in relatively flat or declining metro economies such as Albany, Detroit, or St. Louis.2
This is the oldest rule in real estate: location, location, location. Firms such as Ballard Global focus on specific two dynamic markets in different parts of the country for a reason. Just as the best investment advisors will select a high-performing ETF or mutual fund based on a depth of expertise, so too the best real estate investment firms must be comprehensive experts in their selected market. The best will be fluent and well informed on the current trends, including any decreases or increases in the average rent, income, interest rates, and even unemployment/crime rates.
This underscores how a complementarity of approach extends to the kinds of proven expert advisors who are ideal at structuring real estate investments. In the same way the best brokers and financial advisors will get to know a company, its products, its leadership, and its long-term performance before making a recommendation, a real estate investment professional will have a deep knowledge of market macroeconomics, demographics, historical and future market growth trends, economic risk, migratory trends, local business growth and employment, and many other factors such as local authorities existing and future development plans.
As with financial investments, these are just some of the elements that must be considered when determining the quality of a real estate investment3.
At a higher level, real estate investing is especially complementary to traditional market investments because of two overarching macro or mega trends that are likely to favor the tangible, long-lasting, “real” aspect of property over pure financial vehicles.
1 Eric Schatzker and others, “Bill Hwang Had $20 Billion, Then Lost It All in Two Days”, Bloomberg Businessweek, Apr. 8, 2021. https://www.bloomberg.com/news/features/2021-04-08/how-bill-hwang-of-archegos-capital-lost-20-billion-in-two-days.
2 Current and historical house price indexes by Metropolitan Statistical Area (MSA) are found at Federal Reserve Bank of St Louis, Federal Reserve Economic Data (FRED), S&P/Case-Schiller House Price Indexes by MSA: https://fred.stlouisfed.org/categories/32261?t=msa&ob=pv&od=desc.
3 Karol Klimczak, Determinants of Real Estate Investment, Economics & Sociology, Centre of Sociological Research, Vol. 3, No 2, 2010, pp. 58-66.
Market Volatility Trends
Despite the pandemic and economic upheavals, the stock market continues to defy logic and gravity. There are many reasons given, from the perceived lack of alternative assets to speculative Reddit-driven groupthink. The old saying is the market is not the economy, but eventually the two must reconcile. As of Q4 2021, the National Federation of Independent Business (NFIB) Small Business Index was replete with supply chain disruptions, regulatory uncertainty, labor shortages and future price hikes. As the economist and Institutional Investor All-Star analyst David Rosenberg commented, the NFIB index is a harbinger, and the latest reports show an environment that is not bullish for financial assets in general.1
A diversified financial investing approach helps, but for even experienced investors there is a great deal of guesswork involved in achieving the right balance of equities versus fixed income assets, tech stocks versus healthcare versus industrials, and domestic versus global. While it is important to hold to a consistent, well considered financial investing strategy, it is equally important not to be under any illusions.
The famous Princeton economist Burt Malkiel, in his book A Random Walk Down Wall Street, maintained that a group of monkeys will pick stocks more successfully than a group of advisors, a bold assertion that has never been disproven.2 Indeed, two years ago at the Sohn Investment Conference in New York, a selection of stocks picked by throwing darts at the stocks list in the print edition of the Wall Street Journal was shown to outperform the pros by 27 percentage points.3
It may be the case that the sheer breadth of market investment means nobody can ever truly master the information needed to build a wholly risk-mitigated strategy. That is not a reason to avoid the market, far from it. Investors have benefitted greatly from the market exuberance of the past few years. But it is a strong argument for diversification and finding complementary vehicles to ensure your wealth-building plans stay on course no matter what.
1 David Rosenberg. Breakfast with Dave Newsletter, Rosenberg Research, Sept. 28, 2021 (by subscription).
2 Burton Malkiel. A random walk down Wall Street : the time-tested strategy for successful investing. New York: W W Norton, 2003.
3 Mitch Tuchman. Opinion: Random darts beat hedge fund stars — again. MarketWatch, Jun 26, 2019.
Broader Societal and Economic Trends
In no small part, societal trends support a real estate investing strategy as a necessary complement to other asset classes. The pandemic brought into stark display a few trends that had been evolving over the past decade. The advent of working from home and the isolation of the pandemic lockdowns led vast numbers of people to re-evaluate how, and where, they live.
As the Director of the Urban Reform Institute and Chapman University professor Joel Kotkin notes, “the pandemic has ruined plenty, but it has also handed us an opportunity to redesign work and community, creating new possibilities for millions of Americans and providing a boon for young families. If we take advantage of it, we could finally begin to restore the future prospects for our increasingly diverse metropolitan populace, liberating them from overcrowded housing and debilitating commutes…”.1
Ballard’s key markets of Austin, Miami and Denver have each seen a massive inflow of new residents as more and more people have left cold, high cost, high tax climates for the sunnier, more spacious and more business-friendly environments of Texas, Florida, and the mountain west. A vast economic migration is under way, from Silicon Valley to Austin, from Wall Street to south Florida, and from the beleaguered cities of the Pacific northwest and rustbelt Midwest to Denver.
As noted, this migration of people and money has already pushed real estate prices upwards across the country, and specifically in these key sunbelt metro markets. As the new post-pandemic economy emerges, many analysts believe these trends will accelerate.2 Market investing will benefit from the forward-thinking companies that harness the wave, but savvy real estate investing today will ensure that the broader economic and wealth-building benefits of “real economy-based” real estate price appreciation are shared by investors who know to build a complementary real estate investing strategy into the core of their portfolio.
1 Joel Kotkin, The Great Office Refusal, Tablet Magazine, Oct. 5, 2021. https://www.tabletmag.com/sections/news/articles/great-office-refusal-joel-kotkin.
2 Freddie Mac, Economic & Housing Research Insight, January 2021.