Real estate or financial investment? This is an age-old dilemma pondered by many. US-based Imperial Fund has helped make the decision a little easier by looking into the profitability levels and risks associated with both.
There is a belief that financial investments are more profitable than “bricks and mortar”. However, that trend was displaced by the advantages of global real estate investment, which takes advantage of market cycles.
It is reasonable to consider that an investment portfolio should always contain financial and real estate assets. The percentage of participation will depend on the preference of the investor, his risk profile, his objectives, his past experiences and those who advise him.
It is important to understand that there are sophisticated forms of real estate investment, where amounts of investors achieve high returns, much higher than those achieved with low-risk financial assets.
Certainly, traditional real estate investment is passive and leaves low returns. However, global investment fund models that take advantage of economic cycles have driven greater advantages of real estate investment over financial.
In fact, the profitability of the financial investment also depends on a thread when the statistics are reviewed.
There are many examples of financial debacles that in the last 100 years have left many investors in ruin, especially those who took debt to buy shares. In the last 40 years, those investors who opted for a more active strategy, that is to buy and sell at the most convenient times, also could not exceed the return, since there was also a strategy to keep the assets in the portfolio.
Companies like Imperial Fund, which acquire and manage investment portfolios primarily comprised of mortgage loans, real estate debt securities, loans and related instruments, are a great partner when managing risk and structured finance, whether the investment strategy is passive or active.
On the same line, with an effective active strategy, that is, taking advantage of the recovery and expansion phases of real estate cycles, we see that in different markets only the appreciation exceeds two digits. Recent cases are Argentina, from 2003 to 2008; the United States, from 2009 to 2014, and Dubai during the past five years up to date, among others.
The advantages of real estate investment:
Price below value
In real estate investment, you can buy below market value. In financial investments, all investors pay the shares and bonds at the same value each day.
Nobody gets a share of Telecom or Apple at a lower price than their stock price. But you can buy a property with a discount of 30% of the market, in certain situations such as property auctions.
Correlation to the crisis
Real estate investments tend to better withstand the financial crises that markets suffer. Financial assets correct in an important way, including funds and shares of real estate companies. A true reflection of this was Argentina in 2008, where real estate assets, despite the global financial crisis, did not adjust.
Easy access liquidity
Undoubtedly, financial assets are more liquid than real estate. But if you operate in international markets such as the United States or Spain, you can access mortgage loans at low rates. In just 45 days, liquidity is obtained with financing on portfolio assets.
Better risk equation versus return
In markets in recovery phases, there are a lot of assets in distress; that is, they are below the replacement cost and the market value. In this way, returns greater than 15% net annual in hard currency can be achieved, without leverage.
To achieve these returns on financial assets, you must be willing to operate on assets that involve a high risk of capital losses and high levels of leverage.
Lower forecasting risks
The forecast for corrections and cycle changes in real estate asset markets are much more predictable than in financial assets. This is one of the great advantages of real estate investment.
Using a control panel with macro and micro variables of the sector, it can be predicted well in advance, when the growth curves begin to decrease and stagnate and estimate how long a correction process begins and the phases of the cycle change. On the other hand, in spite of being able to see a correction of the market, the financial sector can never estimate when, to what extent and what will be the cause of the correction.
Low impact on the exchange rate
Generally, when investing in the financial sector, there is no exchange rate coverage. That is why, given a rise in the exchange rate, the impact of financial assets is very high. On the other hand, although real estate assets are also affected by an increase in the exchange rate, they do not have the same correlation.
The low correlation of crises in different markets
When a real estate market is in crisis, it does not necessarily affect another market since, in the real estate sector, the effect is usually located where the correction is manifested.
Generally, the projections of the returns of the real estate assets are usually more certain than that of the financial assets of variable income and with a very low level of risk and often with higher returns.
Wide diversification
Financial and real estate investments alike allow you to participate in different markets and sectors. A broad and diverse investment portfolio can also be developed, with different types of assets in different markets.
How to benefit from the advantages of real estate investment
If you thought it was not so beneficial to invest in real estate, you could change your mind. But all this works if the investor ignores the enemy number 1 of real estate investments: buy and leave them in the portfolio for life. That traditional investment model, although it seems safe, does not effectively generate a high return. For this, the key is active investment management.
Imperial Fund is a mortgage investment fund formed in 2014 and headquartered in Hollywood, FL. Imperial seeks to achieve attractive risk-adjusted returns by exploiting inefficiencies in the residential and commercial real estate lending market.
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