When markets start to get turbulent, every investor gets a little anxious. In 2023, for example, the S&P 500 experienced over 100 days of 1% or greater moves, creating significant uncertainty for investors. Stocks drop, sentiments shift, and suddenly, that meticulously planned portfolio doesn’t feel quite as bulletproof as it did before. In times like these, you may find yourself questioning where to best place your capital. Today, we’re diving into why real estate can often be a more stable investment compared to stocks during periods of economic uncertainty—particularly in volatile markets.
Let’s face it: market fluctuations are nothing new. Lately, though, volatility seems to have become a permanent guest. For instance, in August 2024, the S&P 500 experienced a sudden 5% drop within a week, triggered by unexpected inflation data and geopolitical tensions. The VIX, often referred to as the “fear gauge,” surged multiple times this year as traders continue to grapple with fears around rising interest rates, geopolitical tensions, and a somewhat erratic economic recovery. In an environment like this, preserving wealth becomes a priority.
That’s where real estate investment comes in.
Real estate has always had a unique, almost tactile quality that sets it apart from the digital shifts of stocks. While a stock represents a fractional ownership of a company, real estate provides you with something tangible: a physical asset that doesn’t simply vanish in a moment of market panic. Even if the market sees fluctuations, real estate maintains intrinsic value that isn’t as sensitive to daily or hourly news cycles.
During times of economic uncertainty, investors often find solace in assets that have “fixed supply” characteristics—like real estate. After all, land isn’t being manufactured at scale. Demand for rental properties, whether residential or commercial, doesn’t just disappear when the market dips; people still need places to live and work. In fact, this demand can even increase in a crisis, as individuals look for more affordable living arrangements and businesses rethink their rental needs.
Economic uncertainty is often paired with inflation—and lately, we've seen inflation levels that have not been experienced in decades. Real estate, unlike most other asset classes, provides a natural hedge against inflation. This is because as the cost of goods and services rises, landlords can often increase rent prices, which helps property owners maintain their purchasing power and ensures that rental income keeps pace with inflation. How? Rents typically rise with inflation. The cash flow from income-producing properties adjusts to the prevailing economic conditions, meaning that investors aren’t left flat-footed as the dollar depreciates in value.
In contrast, stocks, particularly growth stocks, can suffer dramatically during inflationary periods. Rising interest rates diminish the future value of earnings, compressing valuations and leading to volatile swings that often scare even the most experienced investors. Real estate, through rental income and property appreciation, not only preserves but often enhances its value in such an environment, making it a compelling choice for wealth preservation.
One of the key advantages of real estate is its potential to generate consistent cash flow—a feature that shines in stark contrast to the often irregular dividend payouts from stocks. With a rental property or a well-placed commercial real estate investment, the income is predictable. The loans we invest in through the REI Transactional High-Yield Fund I LLC, for instance, are carefully chosen using the 4 C's
Collateral- Ensuring the properties we are using to secure the loan have sufficient equity to fully protect our investment
Character- Working with strong borrowers that understand how to operate a real estate portfolio and have demonstrated a history of financial responsibility
Capacity- Ensuring the customers have the financial means to meet their monthly obligation to REI Transactional as well as achieve the exit strategy they have outlined to us for the repayment of their loan.
Credit- Only working with borrowers that show a history of financial responsibility.
Even in a challenging economy, our fund focuses on opportunities where the intrinsic demand for housing or workspaces is resilient. The structured 15% preferred return, combined with quarterly distributions, speaks to our commitment to delivering tangible and consistent income, even when broader markets are on edge.
Most sophisticated investors understand that diversification is crucial. Real estate offers a diversification play that is less correlated to the stock market—meaning that, historically, the ups and downs of stocks do not move in tandem with real estate values. By adding real estate to your portfolio, you essentially reduce your overall risk by balancing high-volatility equities with the comparatively low-volatility nature of properties. A study by the Investment Property Forum found that adding a second property to a portfolio produced the single biggest reduction in risk, with the standard deviation in total returns decreasing from 11.0% for a single property to 8.8% for a two-property portfolio.
Think about the practical dynamics here: if stocks plummet due to fears around tech earnings or an unexpected geopolitical event, the value of a property in a well-situated neighborhood is likely not affected at the same magnitude. Diversification isn’t just about mixing sectors; it’s about ensuring that all of your financial eggs aren’t in a highly correlated basket. Real estate provides a sturdy counterbalance.
Our fund is uniquely positioned because we approach real estate with a deep respect for protective equity. Unlike the margin lending practices in the stock market that contributed to wild market swings in 2023, the leverage we use is always underpinned by carefully managed Loan-to-Value (LTV) ratios. We cap our LTVs at 60-65%, which ensures that there is significant equity beneath each investment, creating a cushion against potential downturns. This is one of the reasons why REI Transactional has maintained a 0% default rate so far—something that not many stocks, nor even many funds, can boast. For comparison, the average default rate in the private debt market is around 3-4%, highlighting the strength and security of our approach.
At its core, real estate investment stands out during volatile markets because it provides certainty. It's about owning something tangible, benefiting from consistent cash flow, enjoying natural inflation protection, and having built-in diversification. With REI Transactional R, we continue to be committed to preserving and growing your wealth through carefully vetted opportunities that emphasize stability, quality, and predictable returns.
While stock markets will always have their allure—and yes, their dramatic rebounds and dips—the often-overlooked advantage of real estate is its capacity to stay relatively unmoved by noise. For investors seeking a smart allocation of their wealth, real estate is not only a diversification tool but also a strategic hedge against unpredictability. When things are calm, real estate builds; when things are turbulent, real estate protects.
Curious how you can add stability to your portfolio with real estate? Reach out to discuss opportunities within our fund and find out why our investors continue to stay the course even when the broader market wavers.
