How to Outperform the Stock Market 3 to 1

Apr 5, 2017

Real estate has a reputation as a risky investment — at least when compared with the equities markets. That’s especially the case for the Millennial generation, who saw real estate values decline rapidly during the subprime mortgage crisis and subsequent recession. Often, the house they grew up in took a big hit.

The equity markets suffered a downturn in 2008 as well. But it wasn’t long before stocks recovered from that crash —stocks have now well surpassed their previous highs. Real estate – with the notable exception of multifamily properties in certain very large markets – took longer to execute the same kind of recovery.

It would be shortsighted to look at this recovery and conclude that stocks are the safer bet to outperform the real estate market. A deeper examination of the data shows that most investment classes of property have actually done better than stocks, especially apartments.

In fact, multifamily has provided better returns to investors since the beginning of the 21st century than a diversified stock portfolio.

Stocks Performed, but Real Estate Took Home the Bacon

The historic performance of the stocks listed on the S&P 500 since 2000 has been strong, outpacing both inflation and wage increases from that year until 2015. That’s true despite the mild recession of the early 2000s and the deep one later that decade.

An investor who put $25,000 in an index fund based on the S&P 500 in 2000 would have seen it go up and down. By 2015, that investment would be worth just a bit more than $46,600. That’s an equity multiple of 1.86x, or fairly close to a doubling. Not bad.

However, had the same investor put that $25,000 in an index based on multifamily REITs, their investment would have grown to more than $138,900 in 15 years – almost  three times the size of the S&P 500 investment.

The multifamily REIT investment equates to an equity multiple of 5.56x, and — after accounting for the initial $25,000 investment — a return that’s about five times greater than what would have been achievable with the S&P 500 index.

Looking at this performance, it’s no surprise that real estate investments, including for-rent residential properties, have been a sturdy inflation hedge to protect against a loss in the purchasing power of the dollar for many years. That might not be such an important short-term consideration at a time with low inflation — such as during the 2010s — but even a little inflation each year adds up over the long run. Real estate values tend to stay ahead of that kind of creeping erosion of the value of an investor’s dollar.


Why Apartments Are Doing So Well
Renter households are projected to grow as a percentage of all households in every upcoming generational cohort. As a result, U.S. multifamily investment sales set a new record in 2016 with a $150.3 billion transaction volume.

The success of multifamily real estate helps make it perhaps the most accessible investment class for individual investors – especially those using a crowdfunding platform to invest. It’s also a popular one for REITs and direct owner operators.

Let’s examine the economics and demographic factors driving this activity.

A good share of any given population either can not — or does not want to — own their residence. Roughly 36% of U.S. households live in rentals. Nearly one-third of these 110 million people live in households that earn less than $25,000 a year. Additionally, families with children — historically on of the household types most likely to own — are increasingly turning to rentals.

But there are more specific trends tilting demand toward rental housing, especially in the last 10 years.

The number of Millennials (ages 18-34) surpasses Baby Boomers (ages 51-69) by more than a million people, according to the Census Bureau. And, Millennials are creating a massive boost in the rental housing market. Over the next 10 years, Millennials will raise the ranks of households aged 18 to 44 by 4.1 million.

Despite the recent economic recovery, Millennials still are not jumping into homeownership as rapidly as their elders did.

A combination of sluggish income growth, increasing home prices and higher interest rates is delaying home buying by many Millennials. Ultimately, this prolongs their time as renters, and increases the demand for apartments. Also, the Baby Boomers aren’t out of the game yet either. As they age, many of them want to downsize into more easily managed rental units.

As for the supply of apartments, absorption rates and occupancy levels in most markets nationwide now exceed historic averages. Construction lending isn’t as easy to obtain now as a few years ago.

In addition, construction costs are rising. That will keep inventory levels tight in all but a few markets, which helps sustain rents, and thus property income. In short, apartments are a good bet moving forward.

Now that you’ve learned what to invest in and where to get the most out of your savings, the next step is deciding what the best investment platform or model is for you. Crowdfunding has become one of the most viable platforms – with an easy barrier to entry and no property management responsibilities required.

There are five key metrics that are vital when evaluating a crowdfunding deal – you can continue to learn more by clicking here.