It's been a volatile week for the stock market, to say the least. And many investors are now sitting on paper or on-screen losses in their portfolios compared to where they were at the start of the month.
Granted, this recent upheaval shouldn't have come as much of a surprise to seasoned investors. Not only have stocks generally been overvalued for a long time, but the events of the past week could also be attributable to the Federal Reserve's plans to raise its interest rates this year, as well as a delayed reaction to the omicron surge.
If the recent stock market sell-off has you shaken up, you may be wondering if it's time to branch out and spread your money around. But should you look at investing in real estate? And is that less risky than stocks?
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A different sort of risk
When we talk about investing in real estate, there are several ways to go about it, each of which carries its own level of risk. First, you could buy some properties and rent them out on a short- or long-term basis. The rental income you collect can be used to cover your mortgage payments and various expenses. Then, at some point, you can sell those properties at a profit.
It's a good idea in theory. But keep in mind that owning physical real estate could mean spending a small fortune on maintenance, repairs, and property taxes. And right now, buying real estate generally means paying a premium, with home prices up on a national level. As such, income properties are a somewhat risky bet right now, despite strong rental demand.
The same holds true for house flipping. Rather than buy homes and hope their value appreciates over time, you could buy properties in disarray, fix them up, and sell them at a higher price point than what you paid.
This could also be a good way to branch out if you've historically mostly invested in stocks. But keep in mind that house flipping can be even riskier than buying income properties and holding them for many years. If you're not experienced, you might make the mistake of overimproving a given property and not scoring as high a profit as you otherwise might get.
With building materials costing so much right now, you can expect to spend more to whip a fix and flip into shape. And so the profit you end up with may not be a number you're happy with -- if you manage to profit at all.
A good way to break into real estate
Despite the risks that come with owning or flipping physical properties, there's money to be made in real estate. And it's generally a good idea to own a host of different assets rather than limit your portfolio to stocks alone, so buying properties could be worth it for the diversification alone.
But if you're feeling skittish about owning physical properties and are, in fact, looking to minimize risk in your portfolio in light of recent stock market volatility, you may want to consider buying REITs, or real estate investment trusts, instead. The upside of REITs is that you get to invest in real estate without owning physical properties and being responsible for their upkeep.
REITs are also a good way to secure a steady income stream, as they're known to pay generous dividends. While REIT values can rise and fall with stock market movement, that doesn't always happen. This means you may find that holding REITs is a great way to keep your losses to a minimum when stocks crash without warning.
A generally smart strategy
You may be tempted to put money into real estate right now, given recent stock market volatility. But don't just turn to real estate when the stock market gets rough. Real estate is a solid investment when stock values are both up and down, so think about the ways you might incorporate it into your portfolio.
