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Every investment class is prone to experience volatility, and real estate is no different. Volatility refers to a given investment’s price increasing and decreasing over a particular period. When the cost of a given asset increases, investors are happy, but the fact remains that prices can’t always increase. There are also times when an investment drops in value. These fluctuations are considered volatility, and savvy investors understand how to forecast it, identify it, and invest in a way that prevents volatility from damaging their portfolios.
There is no escaping volatility; however, selecting suitable properties resilient to economic shifts can significantly reduce its impact. By focusing on such investments, some of the world’s most successful investors have learned to accept certain levels of risk and volatility. They have developed strategies to manage their portfolios effectively, allowing them to avoid potential price drops within their chosen asset class.
Property investments are volatile in the same sense that every investment class has an inherent amount of volatility. Some aspects of the volatility of the real estate market are easy to understand. For instance, if a home you own as a rental property falls into a state of disrepair, it is worth less than it would be if it were in good condition. Conversely, if you invest money into a property and make improvements, it is worth more. In that sense, the fluctuations are easy to see. However, there are other ways that real estate falls under the heading of a volatile investment.
Real estate is considered a volatile investment for several reasons:
While real estate offers opportunities for value appreciation through strategic decisions, its reliance on market conditions and external influences makes it an inherently unpredictable investment.
The answer to this investment question isn’t as simple as choosing “low” or “high.” Instead, this question can only be answered by examining your investment strategy, personal financial goals, and how much money you can access should your portfolio need a sudden infusion of cash.
Low volatility is better for investors who want to take an incredibly cautious approach. Since volatility refers to the fluctuations in the value of a given investment, those who want to take a careful approach to their investing prefer low volatility. Low volatility means that an asset’s lowest and highest potential values aren’t all that different. The primary downside to this option is that you become limited as to the maximum amount you can make from a given investment. For example, say that you purchase a piece of real estate that will provide somewhere between $1,500 and $2,000 per month. You can plan accordingly for an investment that will provide monthly income between those two amounts. You will probably never make more than $2,000 per month from the investment, but you can also assume you will never earn less than $1,500 monthly.
Conversely, high volatility is more of a high-risk, high-reward proposition. The earning potential of a highly volatile investment may be much higher than that of a lower volatility investment. Still, the risk associated is that the investment has a much lower floor. For example, purchasing a property generating up to $3,500 monthly may sound incredibly appealing. However, if the same property’s lowest possible earning potential is $500, it’s a much riskier proposition. While the property can make up to $1,500 more than the highest feasible income of the first property we discussed above, its lowest earning potential is only one-third of the floor of the first property.
Determining which of those properties is best depends on how risky you want to be with your money. You’ll want to choose the low-volatility investment if you're a conservative investor. However, if you’re not as risk-averse, the high volatility option may be sound with its higher potential monthly earnings. If you opt for the more volatile investment, you must have enough cash to keep yourself afloat should the investment reach its lower earning potential. Partnering with a professional team like Alliance can significantly mitigate risks and optimize strategies, ensuring a solid return on investment in property ventures.
The stock market is a much more volatile investment option than real estate. For example, if you fill your portfolio with investments in tech companies, you are more prone to the volatility of a downward trend in the tech market. An increase in the correlation between industries in the United States stock market has made it even more volatile. Stocks are an essential part of any portfolio but an incredibly volatile option. One of the most effective ways to protect yourself from stock market volatility is to diversify your portfolio as much as possible.
Mutual funds can either be high or low in terms of volatility. As with real estate, the higher the volatility of a mutual fund, the greater the potential profits it will generate. A mutual fund’s net asset value is based on its underlying securities, such as stocks and bonds, meaning there is potential for volatility on multiple levels. Before choosing a mutual fund investment, check the historical trends to see how volatile that particular fund has proven to be.
Index funds are significantly less volatile when comparing real estate to index funds. This reduced volatility stems from their strategy: instead of attempting to beat the market, index funds pool investors' money to purchase a diversified portfolio of established stocks, which tends to stabilize returns over time.
Real estate, by contrast, offers tangible assets that can generate income and appreciate but are subject to market dynamics, local conditions, and property-specific risks. While index funds provide consistent, lower-risk investment opportunities, real estate can deliver higher potential returns with the right strategy and risk management. Investors seeking stability might lean toward index funds, while those looking for tangible assets with higher growth potential may prefer real estate.
When evaluating investment opportunities, it is essential to analyze the unique characteristics of each asset class to determine which aligns best with financial objectives and risk tolerance. In contrast, residential and commercial real estate present opportunities for returns. Commercial real estate (CRE) distinguishes itself as a recession-resilient choice, particularly for investors seeking stability in market volatility. Examining the key CRE asset types and the specific strengths that make them less susceptible to economic fluctuations is essential to understanding what makes CRE a substantial investment during uncertain times.
Medical office properties are a cornerstone of the healthcare system, offering essential services regardless of economic conditions. Healthcare is a nondiscretionary need, meaning that even during recessions, people still require medical care. These properties are often leased by doctors, clinics, or diagnostic labs, which tend to sign long-term leases to secure their operating spaces. For example, during the 2008 financial crisis and the COVID-19 pandemic, medical office spaces maintained high occupancy levels as healthcare services continued uninterrupted. This combination of essential services and long-term tenant stability ensures a steady income stream for investors.
Veterinary properties are increasingly resilient due to the growing trend of pet ownership. In the United States alone, pet ownership statistics indicate that approximately 66% of households own at least one pet, equating to about 86.9 million families. People prioritize their pets’ health, ensuring consistent demand for veterinary services even in tough economic times.
These facilities are often recession-resistant as services like checkups and emergency care remain necessary. Veterinary clinics typically operate under long-term leases, providing predictable rental income for property owners. For instance, during the pandemic, veterinary services saw steady growth as pet adoption rates surged, further solidifying the reliability of this asset class.
The growth of e-commerce has significantly increased demand for industrial spaces, with companies like Amazon and FedEx relying on them for order fulfillment. These properties often operate under long-term leases, ensuring predictable income. For example, during the pandemic, the surge in online shopping drove sustained demand for warehouses, proving their reliability as an asset class. The ongoing expansion of e-commerce and global logistics ensures that industrial properties remain a stable investment option.
Retail properties anchored by essential services, such as grocery stores, pharmacies, medical, and banks, have proven resilient investments. These businesses provide goods and services that remain in demand regardless of economic conditions. For instance, during the COVID-19 pandemic, grocery-anchored retail centers continued to attract consistent foot traffic, even as other retail segments struggled. This reliability stems from the critical nature of their tenants’ offerings. Furthermore, these properties often feature a diverse mix of tenants, spreading risk and providing steady cash flow for investors.
Investors looking to expand their portfolios in residential real estate will find multifamily properties a more substantial option against volatility than single-family homes. Multifamily investments benefit from a diversified tenant base, which spreads risk and reduces the financial impact of vacancies. Unlike single-family properties, where income depends on a single tenant, multifamily buildings generate revenue from multiple units, ensuring a more consistent cash flow even during economic downturns. Additionally, renters prioritize housing costs, making multifamily properties less susceptible to the market fluctuations that often impact single-family homes. With average occupancy rates in the U.S. reaching approximately 95% in 2023 and strong demand in urban areas bolstered by government-backed housing programs, multifamily properties offer stability and resilience in a volatile market, making them an attractive choice for long-term investors.
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In addition to knowing what piece of real estate to buy, it’s equally important to know when to buy it. As we’ve already established, the real estate market is in a constant state of change. With so many external factors to consider, you must leap into the real estate investment industry at the right time. There are times in the real estate market when the market conditions favor buyers and are more favorable to sellers. Knowing how to recognize the difference and what signs you should watch for can ensure that you’re getting into real estate investing at the right time.
While you don’t have to be independently wealthy to get into real estate investing, you should wait until you are financially stable. Most homes currently for sale in the United States are costly, as the market now favors sellers. While you can certainly take out a mortgage to purchase a piece of investment property, you will still need access to the down payment, closing costs, and other fees associated with owning the property. Ensuring you have more than enough money to pay a few mortgage payments in addition to the other expenses is essential, as it can take time for your investment to generate a profit.
It’s also crucial to wait until you have done your due diligence on the properties you are considering and the neighborhoods in which they are found. Knowledge is power, regardless of the type of investment you’re thinking. You wouldn’t purchase stock in a company without researching its performance and stock patterns. Similarly, you should gather information about the real estate market within a given area before committing to any property.
Finally, you should try to wait and invest in a piece of real estate when the area is in a buyer’s market. Supply and demand are essential principles in any industry, and real estate is no different. If only three properties are for sale in a given area and 15 people want to purchase them, the market favors the sellers. However, suppose you can find a place with abundant inventory and a shortage of buyers. In that case, buyers can get a better deal on a property, as the supply significantly outweighs the demand. In addition to supply and demand, you should also try to purchase a home when interest rates are low, and mortgage terms are favorable. However, this part of the equation does not apply if you plan to pay cash for an investment property.
Do you want to succeed in the ever-evolving world of real estate investment? Our team of experts at Alliance is dedicated to helping investors with all levels of experience locate the best possible properties to meet their cash flow and risk goals and earn the profit they’re looking for.
To determine the optimal duration for a real estate investment, consider your personal goals and how you plan to pay for the property. If you obtain a 30-year mortgage to pay for the investment property, you will certainly need to plan on holding onto it for a more extended period to maximize your profits. Sometimes, you are inclined to sell a property as quickly as possible, such as when your investment strategy is to fix and flip a home. However, suppose you’re investing in a rental property that you can pay cash for mainly. In that case, most industry experts indicate that somewhere between five and seven years would be a good holding duration.
While you can never eliminate the risk of any investment class, there are specific steps that you can take to hedge your real estate investment. One of the most effective methods involves quickly selling properties. Instead of waiting for the value of a piece of property to decrease, you can sell when the value is high before it has time to trend downward. Partnering with a professional team can be invaluable throughout the investment process, offering strategic collaboration in property selection, market analysis, and portfolio management. Such a partnership provides expertise and proactive planning to navigate market challenges and capitalize on opportunities.
Real estate has long been recognized as a cornerstone of wealth building, offering relative stability and substantial growth potential. Its resilience against market volatility makes it an essential asset class for investors seeking to balance their portfolios with reliable returns. For those looking to take their investment strategy to the next level, commercial real estate stands out as an exceptional opportunity within the broader real estate market.
Commercial properties, such as medical office buildings veterinary, retail, and industrial facilities, deliver consistent cash flow, long-term appreciation, and significant tax advantages. These assets are designed to perform even in challenging economic environments, offering recession-resilient stability and reliable growth.
At Alliance CGC, we’ve spent over three decades refining our approach to commercial real estate. With a historical 28% internal rate of return (IRR), billions in successful transactions, and exclusive access to off-market opportunities, we help investors unlock the full potential of this powerful asset class. Whether seeking diversification, high returns, or a stable foundation for long-term growth, commercial real estate with Alliance CGC delivers on every front.
Are you ready to secure your future with premium commercial investments? Become an investor and let Alliance be your trusted partner in navigating this rewarding space.
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