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Is Real Estate a Hedge Against the Stock Market?

With inflation quickly approaching all-time highs and a stock market showing zero consistency, many investors are looking for the best opportunity and safety valve to hedge investments and ride the storm.  Real estate investing is an option that many inves...

Benzinga · 07/27/2022 12:45

With inflation quickly approaching all-time highs and a stock market showing zero consistency, many investors are looking for the best opportunity and safety valve to hedge investments and ride the storm. 

Real estate investing is an option that many investors consider. 

While real estate performance follows some market trends, real estate has been growing in popularity over the past few decades and tends to perform even with other economic indicators showing a potential recession.

Millennials are not the only demographic that loves getting involved early in real estate investing, and many believe it's one of the best ways to support and increase wealth in today's economy.

The primary question you need to ask yourself is if real estate can truly hedge against the drops a stock market is experiencing since the Covid-19 pandemic or during any economic downturn.

Does real estate hedge against these downturns and allow you to keep a safer portfolio, producing returns and not as exposed as a portfolio with no real estate investments?

Any investor with the current capital to consider real estate investing will benefit by briefly reading some of the considerations we plan to discuss in this post. 

Is Real Estate a Hedge Against the Stock Market?

Maintaining a diversified portfolio has been the strategy for decades among savvy and new investors. While some strategies and opportunities have changed, this has always remained true.

How you diversify is where some investors are currently looking for answers and curious if real estate can truly protect against the stock market during the downturns and bad performing year that often produce losses or low returns.

In a way, real estate can provide a good deal of stability during economic turmoil.

However, it's essential to understand that this assumes other factors are equal. Not all investors will profit during a down market just because they own real estate.

One of the common ways real estate can act as a hedge against the stock market is if its real estate that is currently producing income. It's been shown that the rental pricing market remains profitable and relatively stable even during periods of high unemployment and high inflation.

For example, having an apartment complex and 3-bedroom apartments for rent will allow you to create extra cash flow and a solid income stream to ride the storm of negative gains during a down market.

The same could be said if you currently own a mobile home park.

Now, during the down market, you can market to individuals looking into buying a mobile home.

Depending how many units you can rent, your cash flow stream can continue to grow while other investments are waiting for the stock market to rebound.

After reaching a point where you are closer to capacity and have rented a good portion of your real estate holdings, you will be cash-flowing enough income to pay down mortgage debts while profiting and hedging against the market.

Real Estate Does Not Always Correlate with The Stock Market

Most would agree that real estate does not always correlate with stocks and bonds. Meaning 1 does not have a significant impact on the other.

Real estate is one of the best ways to hedge inflation due to having a strong correlation with anticipated and actual inflation.

In recent years, real estate has outperformed the market and offered investors higher returns. This doesn't mean that it doesn't come without risk. 

It means it is a viable way to diversify a portfolio, assuming you have proper knowledge in real estate investing.

You also need to understand that a large difference exists between a single home purchaser and an actual real estate investor.

As a single home buyer, much of this conversation doesn't apply, and here is why.

Single Home Buying as An Investment

Purchasing a home or selling a home can sometimes be more tied to the stock market, depending on the timeline and consumer attitude.

For example, in 2008, many consumers entered a state of panic and began holding their money. When this happens, the home sellers are often in a position where they either can't sell the home or must settle for a lower price.

This can make the investor side of things tricky too, especially for those investors who purchase real estate investments with the plan of renovating and flipping the property.

When this happens, you may be in a situation where you are likely to lose money purchasing a home if the environment is not ideal.

Multi-Unit and Rental Properties

On the flip side, if you are trying to hedge the market during a bad stock market, you are much more likely to succeed as someone holding rental properties producing income during the market crash or recession.

Simply put, single-family home investors attempting to flip, renovate and resell may be more exposed to risk during bad markets than investors who only aim to produce income streams and rent-producing cash cows.

The market will turn upright eventually. It always has. Keeping the cash flowing until it happens is the best way to hedge the stock market with real estate investing effectively.

Does The Current Market Support the Idea of Investing in Real Estate?

Currently, circumstances will make or break if investing in real estate in today's environment makes sense or not. As of today, the housing market has experienced soaring values and prices.

However, depending on your time horizon, it may make sense to purchase with the inevitable hike in interest rates coming soon.

Most would agree that having a 5-year time horizon makes the most sense right now before purchasing real estate. If you don't think you would stay in a house for this long, purchasing doesn't make sense now and exposes you to potential losses.

The same would apply to those attempting to invest in properties to flip in less than 5 years.

For investors, considering the buy, renovate, and flip strategy right now seems like a rough time to start.

Prices are too high, and since flipping typically involves a fast timeline, the chances of loss are also high.

Unless, of course, you have expertise on a geographical location and have research on those specifics that prove otherwise.

Outside of owning cash-producing properties, the environment currently doesn't beg single home buyers to purchase homes. Single-family home investments don't look too good or as if they would produce a strong return on a 5-year or shorter time horizon.

Making Sure Your Time Horizon Is Safe to Invest in Real Estate in Volatile Markets

As an experienced investor or a brand-new investor, the phrase "time horizon" will come up frequently.

Time horizon can determine many factors about your investment strategy and help you avoid unnecessary risks at times that could be devastating for you and your portfolio.

An example would be purchasing stocks and bonds in 2020 at 60 years old without an adequate retirement already in place.

I think you could see the issue with this picture.

The market has since downturned, and in this situation, retirement will likely be put on hold until you can ride the return of the market into positive gains, which could take 10+ years to recover depending on the nature of the losses.

When hedging a market, real estate investing also needs to have the same consideration take place.

Define Your Investing Time Horizon Clearly and Accurately 

If you are trying to create quick money, the current state of investing doesn't support purchasing any real estate.

Single-family homes are too expensive, and your time horizon is too short.

Hence, one of the best options is to consider rental income-producing properties.

Real estate investing to hedge the stock market can be a great idea if you have a longer time horizon.

Rental-producing properties may be a lucrative option to produce cash flow and allow you to begin building your long-term holding investments.

Making sure your time horizon makes sense is something even financial professionals such as CFPs or Registered Representatives are required to check ethically.

However, in a world that has transitioned into a "do it yourself" attitude and where professional advice is less attractive, you are tasked to ask yourself that question and be honest and intelligent with your answer.

If you have the cash flow and time to wait, real estate is 100% an option you can consider. If it's not and in over your head, it may be best to wait until a market presents itself that is safer and more attractive for you.

Our Opinion, Real Estate Can Hedge the Market to Some Extent, but It's Not Full Proof

Using real estate as part of your investing strategy can undoubtedly provide a hedge against the stock market's volatility. Rental properties remain king during economic downturns because they continue providing income to ride the storm.

Rental properties also offer the ability to create significant gains from long-term growth. Paying the mortgage and debt down on a substantial income-producing rental unit takes time, but the upside is enormous. No investing is full proof, and guarantees are not real when it comes to investing.

Real estate investing is a great way to experience significant gains and hedge the market. It seems likely to continue the popular trend it's been riding for decades.