Most investors tend to picture ‘real estate investing’ in one big category. At Aloha Capital we like to remind investors that real estate comes in many shapes and sizes. Why do we do that? Well, because the varied components that make up real estate investing rarely all move in the same direction at the same time. Some sectors are up, while other sectors are down. It is vitally important to diversify not only between stocks and bonds, but also between different types of real estate.
We are currently witnessing an important example of this concept. The commercial real estate market is undergoing a period of extreme stress. Significant changes in consumer and business needs caused by the COVID19 crisis have forced a tremendous amount of uncertainty into the commercial real estate market.
As reported recently in the Wall Street Journal, “The pandemic has emptied commercial real estate across the country as Americans stay home, shop online and avoid offices. Many hotels and retail stores have seen a significant drop-off in occupancy, hitting revenue and property values (“Pressure on New York City Commercial Real Estate Worries Investors”).”
Real Estate often plays a significant role in investment portfolios. This is certainly the case for institutional investors such as pensions, endowments and foundations. However, this is also true for wealthy families and ‘retail’ investors. For the better part of 2020, the commercial real estate portions of these investment portfolios have been under pressure.
Since we started our fund in 2015, we have been vocal proponents of adding exposure to residential real estate lending to investment portfolios. We have never pitched this as a replacement for commercial real estate investing. In our own portfolios, we too are commercial real estate investors. Rather, we believe that residential real estate lending is a solid and proven complement to commercial real estate investing.
Our belief then, as now, is that residential real estate lending can offer a stable and consistent stream of investment returns. A stability that comes in quite handy during periods of general market volatility – like we are currently experiencing. We wrote about this is a related post (In A Volatile Market, Where Can Cautious Investors Go? Don’t Overlook The Comfort And Safety Of The Single-Family Home).
As we continue to see uncertainty and volatility in the commercial real estate sector precipitated by COVID19, we could not be more confident in our thesis. The forces currently propelling growth and stability in the residential real estate market are unique. They are very different than the negative forces forming a cloud over commercial real estate.
We believe that investing in real estate is one of the best and most powerful methods to create long-term wealth. This goes for both residential and commercial. However, having a healthy amount of diversification between the two can help investors weather storms in either. Our 67 months of consecutive, consistent and stable positive returns gives us confidence in our strategy.
Contact us to find out how we can help.