Let’s make a few assumptions before we discuss the top 3 reasons why angel investors should invest in real estate.
The first presumption is that these angel investors have extra money to invest. They probably made their money through entrepreneurial endeavors, working with family, or a lengthy career of hard work for a fantastic firm, whether they are active angel investors now or not, and they are seeking more investment vehicles. The second presumption is that they have sufficient liquid assets to maintain the standard of living they have established for their families.
In the event that both of these statements are accurate, we think that every angel investor ought to be exposed to real estate, in addition to the value of their primary residence. And this is why:
1. Balance risk and return
Many people believe that startups are among the riskiest asset classes. Yet, they may also produce some of the highest returns thanks to exits like Facebook’s acquisition of Instagram and Microsoft’s purchase of Yammer.
To keep investment portfolios under control on a macro level, that high-risk, high-reward mentality needs to be counterbalanced with a medium- or low-risk mentality. While there are plenty of high-risk real estate deals out there, such as new construction and renovation projects, there are also some medium- and low-risk deals, such as first trust deed investments with low loan-to-value ratios and commercial properties with built-in income, that can help balance a comprehensive portfolio.
2. The correlation between startups and real estate performance is low
The possibility of a strong correlation between the real estate asset’s performance and the business is limited unless an angel investor invests in all real estate startups or financial services firms. Each of these asset types is susceptible to the effects of the economy, yet for many businesses, these are the “best of times” because there are more chances. Investors can prosper in both good and bad economic times by constructing a portfolio with little correlation among asset types.
3. Startup investments tend not to generate cash flow, but real estate does
Startups are funded by angel investors. Also, investment in startups is very illiquid. Although most companies fail, it is uncommon for them to produce cash flow for investors through dividends before a sale. Longer-term investments in startups can be made more comfortable by balancing a portfolio of investments with real estate that starts producing cash flow right now. Although real estate can also be quite illiquid, if you invest in homes with rental revenue that exceeds costs plus the cost of servicing any loans, you will receive the cash flow, which is normally distributed quarterly.
Where might an angel investor put that extra money?
Startup companies, of course!