During the Golden Age of Piracy, disobedient crew members were mercilessly flogged by their swashbuckling captains as punishment for their misdeeds. Recently, every investor with money in the stock market has been flogged repeatedly by market conditions. Over the past month, the Dow Jones Industrial Average (DIJA) has lost 34% and the S&P 500 has lost 32% of its value.
In fact, 15 of the last 22 trading days has been negative. Talk about getting flogged! The stock market has a metric for this whipsawing effect, it’s called the Volatility Index (VIX). It’s also called the “Fear Index” because it attempts to measure market risk, fear and stress before an investment decision is made.
How does this relate to real estate investing? In real estate there is no “Fear Index” or VIX. Many financial advisers tell you not to invest directly in real estate. That’s because they know very little about real estate investing. They tell you to never put more than 15% of your portfolio holdings in real estate and, if you do, invest in Real Estate Investment Trusts (REITs). That’s because they earn a commission on publicly-traded securities.
A better way to go is by investing directly in income-producing real estate investments. These investments should be the foundation of your investing philosophy. Income-producing real estate investments should represent a significant portion of your investment holdings. I advocate investing 50% of your portfolio in income-producing real estate because real estate has many advantages over investing in the stocks.
The biggest advantage is leverage. You can’t leverage a stock but you can leverage real estate allowing you to buy more assets with less cash. Another advantage is tax benefits. You can shelter income through depreciation. The IRS doesn’t let you depreciate a stock. Another advantage is 1031 Tax-deferred exchanges. A 1031 exchange allows you to defer all the gain on the sale of the asset.
Maybe the biggest advantage with real estate is the lack of volatility. While the stock market is rocking and reeling and dropping 32-to-34%, your real estate holdings can experience positive cash flow despite all the uncertainly in the economy.
So, the biggest lesson to learn from the recent stock market crash is to reduce your risk by investing more capital directly into real estate income-producing assets. Wait until the stock market rebounds and then pull you money out and invest directly into real estate. It will reduce your stress level and dramatically increase your net worth.