How Correlated Are Public REITs & Stock Markets?

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3. Real Estate Debt Crowdfunding

Real estate debt crowdfunding involves funding loans secured by real estate. Instead of owning a share in a property, you earn interest on a loan (or a pool of loans).

For example, check out Groundfloor as an option that lets you fund short-term purchase-rehab loans for $10 apiece, paying 8-14% interest on average. You get your interest when the loan repays, usually in 2-12 months.

Alternatively, you can invest in pooled funds that let you pull your money out at any time through Stairs by Groundfloor or Concreit. That liquidity comes at a cost however — they pay 4-6% interest.

4. Real Estate Syndications

Real estate syndications are a type of real estate investment that allows multiple investors to pool their money and resources together. This allows them to purchase, maintain, and sell a large property or a portfolio of properties. Syndications are structured as limited partnerships, and each investor is typically a limited partner in the syndication, receiving investment distributions.

The limited partnership is managed by one or more general partners who manage the property portfolio, distribute profits and communicate with investors using real estate syndication software platforms.

The general partner finds properties to purchase, manages them, and sells them. As a passive investor — called a limited partner — you just sit back and collect cash flow distributions.

Real estate syndications pay huge returns (typically 15-30%) and come with nearly all the same tax benefits as direct ownership. The main downside is that they require high minimum investments, usually $50,000 – $100,000. You can get around those by investing as part of a real estate investment club.

Which Types of Properties Have Historically Outperformed Stocks?

The following real estate asset classes have historically outperformed stocks.

Self-storage

The flexibility of self-storage facilities makes them incredibly resilient through all economic cycles. After all, in recessions many people downsize, leaving them without enough room in their new home for all their belongings.

Self-storage facilities have low overhead costs, making them an appealing asset class. The smaller and mid-size units do not need much hands-on management, and can get by with only part time managers.

Based on annual performance data since 2012, self storage REITs have outperformed all other REITs as well as the S&P 500 over the last decade.

Industrial

Industrial real estate is a hot property sector. It’s seen sustained demand from tenants since 2016, and that demand has led to record rental growth, significant increases in land value, and ultra-low vacancies.

Also, industrial real estate investment trusts have outperformed all other commercial real estate investment trusts by sector over the past five years. For example in 2021, the industrial sector earned an annual total return of 32.38%, according to The National Council of Real Estate Investment Fiduciaries’ (NCREIF) data; over double the next leading CRE sector.

And while warehouse space and logistics facilities are seeing high demand, there are new drivers that may support sustained demand for industrial properties in 2023 and beyond.

Residential

Single-family rentals have historically offered more attractive risk-adjusted returns than the S&P 500 and bonds.

Two factors have driven momentum in the single-family rental market: jobs and interest rates.

And unlike bonds and stocks, real estate investing offers the opportunity to leverage a portion of the purchase price by taking out a mortgage.

Senior Living Centers

Given America’s aging population, continued healthcare problems and rising healthcare costs, many believe that the healthcare industry has a very bright future in the U.S.

And they’d be right: according to the Bureau of Labor Statistics (BLS), employment in healthcare occupations will grow 16 percent between 2020 and 2030, far outpacing the average for all occupations. This equates to roughly 2.6 million new healthcare jobs over this period.

And even if economic conditions sour, people will still need medical attention and care.

What Happens to REIT Stocks When Interest Rates Rise?

A rise in interest rates can lead to a decline in the price of REITs. While dividends may increase with interest rates, publicly-traded REITs may decline. This is because higher rates decrease the value of existing fixed-rate mortgages held by REITs. Higher rates also reduce the value of future cash flows from mortgage-backed securities. As a result, REITs may become less attractive investments for investors, leading to a decline in their prices.

So, are REITs and stocks correlated? While there is some variation in the degree of correlation, they’re more correlated than the underlying value of real estate assets would justify on its own. This has been attributed to the fact that public REITs are driven by the same macroeconomic forces that affect the stock market. These forces include interest rates and economic growth. Although public REITS provide solid returns over time, they are susceptible to market forces.

But REIT stocks are just one of many options for real estate investing. Direct property investing, real estate crowdfunding, and real estate syndications all present unique opportunities for investors to diversify their portfolios and generate returns. Investing directly in properties gives you less correlation (and therefore greater diversification).

Real estate investing is now easier than ever. Small-time investors can participate in large real estate property deals and developments through real estate syndications. In low inventory markets where finding the right deals for the right price might be hard, investors can pull resources together and co-invest in properties. Check out SparkRental’s real estate investing club where members can invest in vetted real estate deals for as little as $5,000 apiece.♦

Do you invest in REITs? How else do you invest in real estate to diversify your investment portfolio?