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  • Writer's pictureZach Gendron

Stocks and Bonds Are Not Enough: 4 Reasons Why Real Estate Needs To Be Included In Your Portfolio

Investors who are relying exclusively on stocks and bonds are missing out on arguably the best asset class to achieve their financial goals: multi-family real estate. Institutional investors are keenly aware of the benefits of owning real estate which is why their portfolios only allocate 48-70% of their investments to traditional stocks and bonds, with the remainder being invested in real estate and other alternative assets. Compare that to the average investor who allocates 95% of their portfolio towards stocks and bonds.

Let’s explore why these professionals invest so heavily in multi-family real estate and why you should too:

1. Increased Diversification

Diversification is a fancy way of saying “don’t put all of your eggs in one basket”. Stocks and bonds both trade on the public market (such as the New York Stock Exchange or NASDAQ), which makes them vulnerable when the market drops. On the other hand, real estate is owned on the private market which means the daily swings of the public market do not have an impact. By having both public and private investments in your portfolio, it allows you to weather rocky market conditions and protect your portfolio from a significant collapse.

2. Decreased Volatility

Another benefit of real estate not being owned on the public market is it reduces the volatility of your investment portfolio. This is because real estate is a much more steady investment than stocks or bonds which can fluctuate wildly on a daily basis. In fact, more than 5 BILLION shares are traded EACH day on the US public markets which leads to an immense amount of volatility. Over the last 20 years, the standard deviation of annual returns for the S&P 500 is 17%. While this means great returns in up years it also means extremely low returns (losses) in down years. Real estate does not have that issue as once a multi-family property is purchased, it typically won’t be re-sold for another 3-7 years. This lack of daily trading prevents wild price swings and helps you as the investor sleep better at night.

3. Improved Overall Returns

Decreasing volatility is important but this goal can also be accomplished by keeping your investment dollars in cash. What cash doesn’t provide is any return as your money will more likely than not lose value while sitting in a bank account due to ultra low interest rates and increasing inflation. This is where real estate shines as it provides an excellent return on your investment dollars. More importantly, real estate has outperformed the stock market since 2000, with multi-family investment properties leading the way. While the S&P 500 has had an average annual return of 9.2% over the past 20 years, investments in multi-family properties have an average annual return of 11.8%.

4. Better Tax Benefits

In addition to better, less risky returns, real estate also offers investors significant tax advantages that help shelter your investment income from traditional taxes. There are various tax write-offs such as depreciation, mortgage interest, and other related expenses that can help investors offset their investment gains. In fact, many investors can show a “paper loss”, while being cash flow positive, which leads to real estate investors significantly reducing (or completely eliminating) the taxes on their real estate income. Good luck trying to receive tax-free income with stocks and bonds!

Based on all of these factors, our personal belief is that 20-40% of your investment portfolio needs to be allocated towards real estate. If you agree and are interested in learning how to add no-hassle, hands-off, real estate investments to your portfolio, do not hesitate to reach out!

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