“Platforms are Emerging Which Allow Investors to Invest in Real Estate in a Much More Efficient Way.”
This is a guest article written by Matt Hylland and first appeared in our collaborative e-book “The Future of Property,” which features 17 thought leadership articles covering PropTech, property investment and housing. You can download your free copy here.
Matt Hylland is the founder of Hylland Capital Management, a fee-only, virtually based financial planning and investment advisory firm designed for today’s young professionals. Previously a scientist for the U.S. Navy, Matt entered the industry in 2015 by starting a firm that is his vision for how financial planning should be done. No high-pressure sales pitches, no commission-based products and no asset minimums. Just personalized, quality advice to help enable clients to reach their financial goals. Matt’s advice has been featured in the Wall Street Journal, CNBC and Kiplinger.
“Platforms are emerging which allow investors to invest in real estate in a much more efficient way.”
Real estate investment has historically been one of the primary wealth creators worldwide. From low income [1] to billionaires [2], studies and empirical data have shown that real estate ownership offers incredible opportunities to build wealth.
Like any investment, real estate investing is no panacea. Real estate investing involves significant risks, large amounts of capital concentrated in single investments, and comes with a lot of added expenses. But technology is changing the real estate market. Today, technology allows investors to able to able to do much more to limit the risks involved in real estate investing. Because of this, it is easier than ever for investors to allocate investments to real estate, while keeping risk in check. What is the future of real estate in your investment portfolio? Here’s a look:
Real estate has historically been a relatively stable investment option. Robert Schiller, economics professor at Yale and Nobel Prize Laureate, has one of the most extensive collections of data on the U.S. housing market, with annual data going back to 1890 [3]. In the last 100 years, the worst annual performance for home prices in the U.S. was a decline of 16% in 1918. There have only been 3 years where prices declined more than 10% (which correspond to World War 1 (1918), World War 2 (1941), and the most recent financial crisis (2008)). Even in the worst financial crisis since the great depression, a crisis caused by the decline of real estate prices, U.S. home prices dropped only 12% in 2008 compared to a 38% decline for the S&P 500. From their peak in 2006 to the bottom in 2012, U.S. home prices fell 27%, while the S&P 500 fell 57% from peak to trough in the crisis.
Real estate prices have also kept pace with inflation much better than many investments. In the late 1970s and early 1980s inflation was running in the double digits in both the U.S. and Europe. From 1970 to 1982 the U.S. averaged 7.83% inflation while the U.K. averaged 12.66%. Over that time the S&P 500 returned a -62% return adjusted for inflation, while U.S. home prices returned just -4%.The relative stability comes with an important point; since 1890 U.S. home prices has averaged an annual return of just 0.42% after inflation, far less than stocks. Of course, a primary benefit of real estate investing is not necessarily the appreciation of the property, but the income it (hopefully) generates. A house that cost $180,000 and rents for $1,500 a month can be thought of as a $180,000 investment yielding 10%, before expenses of course. In today’s era of low interest rates worldwide, a 10% yield seems too good to be true, but according to Zillow’s vast collection of U.S. housing data [4], it is right in line with the nation’s average price-to-rent ratio.
“One bad storm, one leaking roof, or one bad tenant can make or break a traditional real estate investor.”
Of course, a return like that brings along a lot of risk as well. A single investment can require $100,000+ in capital, or significant borrowing to get started. That significant investment is then put into one single piece of real estate, where one problem could cost years of profit from rental income. One bad storm, one leaking roof, or one bad tenant can make or break a traditional real estate investor. Today’s real estate market leads a traditional real estate investor to be heavily concentrated into a few investments, similar to a stock investor holding only 1 or 2 stocks. The rewards can be great, but the risks are equally high. A real estate investor may have to save for years to be able to pay for a single piece of real estate, and now their entire portfolio many depend on the reliability of a single tenant, a single builder or a single town’s economy. Because of these hurdles and risks, investing in real estate has not been within reach for most investors.
But technology is helping to change that.
“Today’s technology has the ability to do to with real estate investing what the ETF and mutual fund did to stock trading.”
Today, platforms are emerging which allow investors to invest in real estate in a much more efficient way. Instead of being required to concentrate your real estate investment into a single property, or borrow significantly, real estate investors can allocate smaller sums into many different properties. Today’s technology has the ability to do to with real estate investing what the ETF and mutual fund did to stock trading. Instead of $100,000 invested in a single asset, investors can easily be able to allocate investments into many different, diversified real estate investments.
“Your $100,000 investment in real estate could be diversified between property in the cities of New York and London, the rust belts of Ohio and Liverpool.”
Imagine - instead of your $100,000 investment solely dependent on the economy of a single city or a single tenant, your $100,000 investment in real estate could be diversified between property in the cities of New York and London, the rust belts of Ohio and Liverpool, and the growing areas of Silicon Valley and Cambridge. An everyday investor will easily be able to allocate 20% of his investments to real estate, without having hundreds of thousands of dollars or taking huge risks. A retiree will be able to invest in an investment that produces reliable income, with the protection from a single problem costing a large portion of their retirement savings to fix.
“But now, it is easier than ever for investors to include a completely different asset class into their investment portfolios.”
The future of investing as a whole will largely be unchanged. A properly allocated investment portfolio will always be made up of different investments designed to help investors weather storms and produce acceptable returns. Responsible investors will always hold a variety of investments; bonds despite their low yields, stocks despite their volatility, and cash despite low returns. But now, it is easier than ever for investors to include a completely different asset class into their investment portfolios, an asset class that has historically been stable and produced total returns rivaling or exceeding today’s low yielding fixed income options. If this future plays out, real estate will be a vital piece in your investment portfolio.
- Written by Matt Hylland
- http://www.jchs.harvard.edu/sites/jchs.harvard.edu/files/hbtl-06.pdf
- http://sequre.co.uk/investor-advice/why-invest-in-property
- http://www.multpl.com/case-shiller-home-price-index-inflation-adjusted/table and https://fred.stlouisfed.org/series/CSUSHPINSA
- http://files.zillowstatic.com/research/public/County/County_PriceToRentRatio_AllHomes.csv
Capital at risk