Nery Alaev provides real estate investment guide for the experienced investor

Many of you are experienced investors, with a large portfolio of stocks and shares. But you’re interested in diversifying into real estate. You’ll likely have many reasons for this. Perhaps you’re attracted by the steady, reliable returns, or the potential for decent appreciation of your assets over time.

Well, as an experienced real estate investor, I’m often asked by other investors for tips on getting into this area of investment. So, here I’m sharing with you a guide to real estate investment for the experienced investor.

A real estate investment guide for the experienced investor

1. Understand the strategies that will deliver the results you need

As an experienced investor, you should already understand the fundamental importance of having a clear financial strategy. But, when it comes to real estate, how do you approach forming one that works for you? My advice is that – as with any investment – much of it comes down to your appetite for risk. Traditionally, real estate strategies can be divided up as follows:

• Core: A less risky strategy, that also delivers lower (although still relatively predictable) returns. You’re unlikely to be borrowing heavily to invest, and will choose properties in stable, affordable markets.
• Core-plus: You’re looking at similar markets and properties here, but with a greater degree of borrowing to invest.
• Value-added: This strategy falls into more of a medium (or even high) risk category – but with the subsequent increase in returns that come with greater risk. You’re likely to be buying properties that are undervalued and investing time and money into adding value to them. Borrowing is likely to be higher for investors following this kind of strategy.
• Opportunistic: One of the most interesting strategies to follow in real estate investment, particularly for those of you who are experienced investors. The amount of leverage (borrowing to invest) here is much higher, as are the risks – but so are the potential returns. You may be looking at buying land and building on it. Or you might seek out properties that offer unusually high returns – but only appeal to a small and hard to reach market. Or, properties that fit with this strategy may form a part of a broader – and far more complex – investment vehicle.

I’ll reinforce and expand on this point again later – but having a clear financial strategy and sticking to it is as important in real estate investment as it is in stock market trading. Make sure that every property purchase fits with your overall financial strategy, and contributes to it. And if you have a piece of real estate that isn’t contributing, dump it if the losses are becoming too significant.

2. Understand that diversification is as important in real estate as it is on the stock market

It’s the first lesson we all learn as investors: diversifying is good. Real estate offers stock market investors a good way to expand their portfolio beyond stocks and shares. Reason number one is that it’s great way to mitigate against the risks of a downturn in a particular sector.

But there is another point to make here about diversification – one that applies particularly in real estate. And that is that diversifying actually improves the performance of your portfolio generally – not just when the markets are rocky.

The experts at Fundrise say “Diversifying helps improve your overall investment performance on an ongoing timeframe, by balancing volatility on a daily basis, not just during a dip in market performance.”

Clearly, day to day volatility is less of a concern in real estate than on the stock markets. So, for an investor who is mixing both stocks and real estate, this diversity will increase your potential returns overall.

3. Bring your experience in the stock market to the world of real estate.

While the two investment sectors do have their differences, there are also clear principles that the experienced stock market investor can bring over to the world of real estate. The first is around the need for patience. In the world of stocks and shares trading, this principle translates as not chasing quick wins.

The same applies in real estate. Properties take time to appreciate in value – many years in some cases. Of course, you may be pursuing a fix and flip strategy, but it still requires patience and an eye for the best moment to sell. It also takes time to generate the full benefits of a diversified portfolio too. As I’ve mentioned, diversification is key in real estate, but you need to give all the portfolio of properties time to deliver returns over an extended period to really make the most of it.

The final point here (in terms of lessons we can draw from stock trading) is about not basing your decisions on the prevailing mood of the market. As any stock trader knows, markets go up and down and it is easy to react too quickly and make changes on the spur of them moment. So, as I mentioned earlier, have a clear financial strategy, and then base all your decisions to buy and sell real estate on that plan. Holding your nerve is crucial here, especially if rental yields or sale prices drop. But if you have a robust, coherent plan in place, it will be worth it in the long term.

4. Bring your broader perspective to bear

Following on from that point about having patience, as experienced investors you should also have another crucial quality required by real estate investors. Being able to see the big picture and an appreciation of context is something that only comes with context.

There’s a great example of how experience – and an understanding of the bigger picture, informed by data – can help us to make better investment decisions. An article in USA Today shows that the circumstances around the stock market crash of 2007 were not necessarily a good indicator of how real estate investments behave in a crisis. If you just see the ill-advised subprime mortgages and the ensuing chaos, real estate investment might appear a poor option. But the article explains that real estate’s performance in the majority of bear markets (18 out of 19) has been positive. Meaning that those hard years aren’t a good indicator of real estate’s overall performance.

Experienced investors will always take this kind of broader view and use it to their advantage. Particularly in a market where too many investors just read the headlines.

A final piece of advice for any experienced investor looking to move into the world of real estate. The trends are for the sector to become increasingly global in nature. The experts at PwC explain the financial context: “The real estate market will become far bigger and more global. Real estate will expand by more than 55% from US$29.0 trillion in 2012, to US$45.3 trillion in 2020, according to our calculations. It may then grow further to US$69.0 trillion in 2030.”

That is a gigantic opportunity – particularly for experienced investors. But what is the key to taking full advantage of this opportunity? For me, it comes down to having a strategy that is global in its reach – but relies on specialist, local knowledge. Success in real estate, ultimately, is about what happens on the ground. It is about knowing who walks past a commercial unit every day. It is about understanding why one area delivers high rental yields now, while another has the potential to do it in five years.

So, take a global view, looking at properties in markets wherever you can. But never fail to invest in local knowledge – because this is what will always give you the edge in a highly competitive market.

Nery Alaev is the Director of ESN Investments GmbH, which engages in the acquisition and development of commercial and residential property in Germany and Austria.