Why Consider Apartments as Part of an Overall Investment Strategy?

Investment Considerations

We get this question a lot, especially considering the technological wave created by microchip and AI companies.  The indices and individual tech stocks have been significantly boosted by technology investments over the past few years.  In this article, we look at why having a financial plan is key as well as the historical returns of the S&P 500 stock index compared to commercial real estate investment trust returns.  We also provide information to help investors consider adding commercial multifamily real estate investments to their financial plan. 

The Importance of a Financial Plan

Financial plans can change as investors age.  Often in our younger earning years, the focus is on getting money into the market so that compounding can work its magic.  If employers are matching a percentage of the pre-tax income placed into the 401k or other investment plan, it’s a shame not to take advantage of that benefit.  It is important to start setting goals early and understand the options your employer’s retirement savings plan offers. 

Unfortunately, many investors who were invested in retirement accounts during the 2008-2009 recession remember seeing in some cases more than 50% of their investment portfolios wiped out.  According to Investopedia, the S&P 500 fell 56.8% from October 2007 to March 2009.  For those close to retirement, it meant working longer to rebuild those accounts and postponing retirement.  If you have time to wait until retirement, riding the waves of the stock market may work for you.  However, it is wise to speak with a financial planner to understand the risks and benefits of solely relying on a retirement account with your current employer. 

A financial planner will ask about your financial goals: 

·      Do you have children to plan for?

·      Do you have debt to work on? 

·      How is your credit score? 

·      Are you adequately insured, and does that insurance align with your goals?

·      Are you caring for an aging parent or planning to in the next decade?

·      Do you have college expenses for your children to consider?

·      Do you have philanthropic goals? 

·      Do you want to travel?

·      When do you plan to retire? 

·      Are you thinking of starting a business?

·      How will you structure that business? 

Exploring Other Investment Paths

If you haven’t taken the time to think about these goals, it would be beneficial to spend a few hours reviewing them and then to schedule an appointment with a certified financial planner. 

Some investors are exploring alternative investment paths, such as cryptocurrency, precious metals, and private investments in other businesses.  All of these investments have their opportunities and risks. Historically, the stock market and commercial real estate have been two of the top ways investors invest outside of their own businesses, which is why we are focusing on real estate and stocks in this article. 

Understand Market Returns

When watching business channels, it can be difficult to gain perspective on the market’s annual average performance.  Percentages fluctuate daily on the Dow Jones Industrial or the S&P 500, but what does that mean for the average investor?  Calculating returns can be tricky.   It depends on when an investor entered the market, how long they held the stock, and when they sold.  This varies for everyone, so we must look at the average returns for the S&P 500 as a guide.  Since this index includes a large number of companies, it’s commonly used to gauge average market returns.  There will always be outliers--those who bought a stock at a few dollars a share and saw it rise into the thousands of dollars per share.  That’s exciting, but not common. 

According to a Business Insider article by Tessa Campbell and Rickie Houston, “the S&P 500’s average annual return for the past decade has been around 10.2% with the S&P 500’s 2023 annual average return coming in at 24%.”  They indicate that the historical average return of the S&P 500 has been 10.7% over its 65-year history.  However, a high return year can be preceded and followed by lower return years and possibly even negative returns.  This is why you will sometimes see a rally day where the stock boards are green, followed by a red pullback day where investors take their profits and reposition their investments.  It’s important to understand where your money is invested in the market, what drives those companies or index funds, and work with a professional to adjust your investments as needed.  This is also why many financial professionals discuss hedging investment portfolios with assets that aren’t directly tied to the stock market.  

Why Commercial Real Estate Matters

Pairing stock investments with investing in commercial real estate has historically helped investors protect against market volatility.  For instance, according to data from the National Association of Real Estate Investment Trusts (NAREIT), which tracks the performance of companies that own and operate real estate investment companies, the average return for multifamily real estate invested in REITs has been 9.88% over the past 10 years.  When extending that period from 1994 to 2023, the average annual return for multifamily investment grows to 12.39%.  This data was pulled for multifamily REIT investments.  REIT investment types can vary so it is important to pull the data for the specific type of real estate investment an investor is considering.  When comparing the longer average return of the S&P 500, it’s clear that publicly traded real estate investment trusts (REITs) have historically held their value and provided growth opportunities.  Private real estate funds may have returns that are higher or lower, as their investment strategies often vary from public REITs.  It’s important to review private real estate investment deals with financial and legal professionals to assess the risks and rewards.  Many private real estate investment fund sponsors will have a targeted rate of return with deal or model data that can help investors and their financial advisors compare investment opportunities against their financial goals and timelines.  By keeping the S&P 500 average returns and public REIT commercial real estate returns in mind, investors can gauge investments and opportunities to further diversify their investment portfolios.   

Ready to explore the benefits of multifamily real estate investment? Click here to learn more about different strategies available.  Stay informed by joining our mailing list for the latest updates and insights. 

 Important Information-Blogs are intended to be educational and rely on information from sources deemed to be reliable.  Nothing in this blog contains legal, tax, financial, or any other type of advice.  All investors should consult their own financial, tax, legal, and other professional advisors to determine if an investment is suitable for their unique situation.