Every investment gives you the opportunity to increase your net worth, generate cash flow and get closer to your financial goals. Investing is a good idea for many people, but not everyone can handle dramatic price swings, especially as people get closer to retirement. Investing in less-volatile assets reduces stress and can help you achieve stable returns instead of pursuing high-risk, high-reward assets. Private equity real estate investment trusts (REITs) provide a healthy mix of cash flow, appreciation and low volatility. 

What Are Private Equity REITs?

REITs make real estate more accessible to everyday investors. They pool funds from investors to acquire properties and embrace a “strength in numbers” model. Instead of saving a lot of money for multiple down payments and managing each property, REITs do that work for you. 

Congress established REITs in 1960 to make real estate investing more accessible to retail investors, and the initiative worked. You can get exposure to industrial properties, residential properties, commercial properties and other types of real estate. Some of these properties require multimillion-dollar down payments, but you can get in with a small minimum investment.

Private equity REITs do not trade on public markets. Not trading on public markets gives private equity REITs several advantages. Regulatory costs are a lot lower, and valuations don’t get too far ahead of themselves, so investors can expect higher yields at private equity REITs. You also worry less about volatility. Most private equity REITs update their price every quarter. They are less correlated with the stock market than publicly traded REITs.

The Pitfalls of Volatility 

Volatility does not mean asset prices go down. It refers to dramatic price swings, regardless of the direction. It’s possible for an asset to have sharp up and down days only to eke out a 0.25% gain for the month. Volatility doesn’t always help investors, and it can create these disadvantages:

• Emotional investing: People should trade based on logic, but many investors let their emotions guide them. When an asset drops 10% in a few days, it’s easy to lose hope in the asset and sell it to avoid additional losses. Selling at the wrong time can lock investors out of considerable gains. A market rally can enact the opposite scenario. Some investors get FOMO and may buy assets at unreasonable valuations only to regret it later.
• Timing the market: Most traders don’t break even, and even if they do, trading the market takes a lot of time and effort. Buying investments with low volatility reduces the need to time the market and can turn you into a long-term investor.
• Stress: You won’t have to see your assets drop in value by refreshing your screen. The daily drama won’t matter as much if you buy low-volatility assets that do not correlate with the stock market.

Risk Management in Real Estate

Volatility is one element of risk management in real estate. Risk management is an important but often overlooked element of investing. While it’s exciting to fantasize about steady cash flow and rapid property appreciation, not all investments pan out. Yes, it’s possible to retire with a diversified real estate portfolio, but risk management in real estate can help you grow your portfolio at a healthy rate. Knowing risks like volatility and how to manage them can enable a more seamless real estate investing experience.

Top 4 Real Estate Risk Management Factors

Every investment has risks. Understanding how outside forces affect your portfolio can help you make better decisions with your real estate. Here are some of the factors surrounding risk management in real estate.

Lack of Portfolio Diversification

Portfolio diversification is the linchpin of risk management. Spreading your capital across several assets makes you less vulnerable if one of your investments becomes unprofitable. Real estate investors often struggle with diversification because down payments require a lot of upfront capital, and monthly mortgage payments also make it difficult to buy new properties. Some real estate investors put some of their funds into a private equity REIT that holds onto several real estate properties. Private equity REITs often have higher yields than publicly traded REITs and give you exposure to several properties.

Macroeconomics

Rising interest rates create pressure on housing prices. Those higher rates increase monthly mortgage payments and make borrowers hesitant to buy homes. Sellers may have to trim their prices to sell. Inflation has also been a hot macroeconomic item over the past year, and rampant inflation reduces purchasing power. While real estate investors had success raising their prices in 2021 to counter inflation, prices moved up slower in the second half of 2022, and some areas saw year-over-year rent declines. Macroeconomic factors can influence when you buy or sell real estate and your approach to finding new tenants.

Liquidity

Real estate isn’t the most liquid asset. The buying and selling process can take several months, and a lot can happen in the real estate market before a transaction gets finalized. Accumulating cash flow from your assets and storing some of it can provide cash to cover expenses. Real estate assets have varying amounts of liquidity. While owning a physical property is considered less liquid, a private equity REIT can add more liquidity to a real estate portfolio.

Over-Leveraging Your Portfolio

Buying multiple properties with leverage can speed your path to wealth, although not without risk. More properties increase cash flow, and your equity positions grow with each monthly payment. In a good economy with few challenges along the way, a highly leveraged portfolio can help you retire sooner. However, a high amount of leverage leaves real estate investors less prepared for vacancies, repairs and other financial obstacles. Being over-leveraged can turn into a curse as the monthly mortgage payments keep coming without enough rental income to cover them. One unprofitable property can force you to sell multiple properties depending on the circumstances. Growing at a slower rate or investing in REITs without leverage can protect you from this risk.

Protect Your Portfolio From Volatility

Volatility creates drama and can add stress to an investor’s life. It can cause investors to make irrational decisions they regret later. Focusing on assets with less volatility can help you feel more comfortable with your portfolio and embrace a long-term mentality despite day-to-day market news providing dramatic storylines.

Frequently Asked Questions