Early in the 2010s, industry analysts noticed that a growing segment of young people was buying a second or third home. These were the millennial investors who, unlike their parents, looked to real estate as the best way to invest rather than stocks. Real estate has always been a top-ranking sector for investing. Most investors aim to diversify their portfolios with both stocks and real estate, however, there was something notable about the young investors who bought multimillion-dollar properties before reaching their 30th birthday: they were investing heavily and near exclusively on real estate. Is hoarding rentals the new form of day trading? Should casual investors overlook stocks in favor of real estate? The answer is not so simple.
Don’t be Spooked by the Stock Market
One of the young investors who depended entirely on real estate to build an investment strategy had a novel explanation for doing so. The 28-year-old interior designer was “spooked” by the stock market. It’s perfectly understandable why a millennial would be wary of the stock market following the Great Recession, however, being highly pessimistic about stocks is just as bad as being overly optimistic about it. It’s impossible to define the stock market by isolating it for a limited period of time. The market rises and falls over the years. The historical record of the stock market indicates a handful of recessions after which the economy bounces right back. Investors should not just worry about another Great Depression or a recession, rather, it’s best to think about what happened afterward. Even if the markets take a downward turn, it may bounce back, therefore, young investors should not be afraid of stocks perpetually being devalued.
Real Estate is Not a “Safe” Option
Some casual investors may have an unrealistic idea of property being a “safe” form of investment. Real estate is hardly safer compared to stocks. The value of properties can suddenly plunge depending on various factors. For example, following the 2008 financial crisis, the value of most properties was severely eroded. This undermined the ability to sell a house or borrow against it. Investors can also overestimate the rent-value of a property. If the neighborhood changes, the rental won’t be as valuable. When you are investing in a property in the long-term, a number of unpredictable events could essentially ruin the investment, therefore, never assume that real estate investment, other than in your own home, is “safe.”
Borrowing to Buy Real Estate Could Lead to Debt Problems
Gains from investments can easily be wiped out by debt. Investors who heavily purchase rental properties also borrow copious amounts of money to cover the down payments, then as a result, there will be multiple mortgages to worry about. As the years go by, this debt can easily surpass earnings gained from rentals. New investors without much capital shouldn’t borrow further to finance second or third homes without factoring in debt. Think about other debts you might have that would pile on top of the mortgage debt. Your future financial security will severely depend on your ability repay all your loans before retirement. Ignoring stocks in favor of real estate can also make investors vulnerable to diversification problem. An investment portfolio focusing solely on real estate is the very definition of putting all eggs in one basket. Investors should ideally invest in both real estate and stock to diversify portfolios and manage risk better.