Real estate investments have long been considered a sound choice for many investors. Before the financial crisis in 2007, it seemed like real estate prices could increase forever. However, just like any other investment, REI does come with certain risks and challenges. The following sections explore the meaning of quantitative real estate investing and why this type of strategy can help you improve your portfolio’s returns.
What is quantitative real estate investing?
In short, quantitative investment refers to strategies based on using an advanced mathematical model or algorithm developed by professionals. To create it, several statisticians, programmers, and investment analysis work together to create a model that can identify investment vehicles with the highest probabilities of outperforming the market. Different models for quantitative real estate investing are available, and they use many factors, depending on the user’s investment objectives.
What is the importance of quantitative REI?
When used correctly, quantitative REI has the same purpose as any other type of investment– to grow your wealth and help you generate excess returns. The developers of such mathematical models use complex processes to create a model that identifies investment opportunities. The main aspect of quantitative REI is that, ultimately, a computer makes the investment decision, not a human. This strategy eliminates any subjectivity or emotional response when making the buy or sells decision.
Quantitative strategies are now widely accepted by the investment community. They are used by hedge funds, institutional investors, and mutual funds with the objective of increasing portfolio returns.
Quantitative investment strategies
Quantitative investment strategies are quite varied as they are created to fulfill a core strategic objective. For instance, a quantitative value strategy aims to help you identify undervalued real estate assets by using financial information. This model is applied to stocks or equities and it generates a list that ranks each option.
For passive investors, quantitative models that use smart beta strategies are one of the best choices. These use factors to improve the risk-adjusted returns over a certain period.
A popular short/long model is statistical arbitrage. This strategy uses financial ratios to open long and short positions and focuses on mispriced assets.
Factor-investing strategies focus on a specific aspect that was proven to outperform a specific market in the past, such as market cap, growth, or value. The quant strategy consists of using a mathematical model that ranks each asset according to these factors.
Real estate investments abroad can be extremely profitable, but they also come with higher risks. Investors looking into foreign assets can use systematic global macro strategies to find the regions with the most favorable fundamentals. This model analyzes different economies in the world, indicating the best real estate assets.
Finally, quantitative investors now employ big data or artificial intelligence strategies to outperform the market given the large acceptance of alternative data. Alternative data employed can be extremely varied – ranging from web-scraped data to credit card transactions.
The benefits of quantitative REI
Quantitative REI essentially requires you to use numerical data – traditional or non-traditional – to make your investment decision. The main benefit is that it is more reliable than other strategies. By removing the human factor, computer-ranked assets have a higher chance of meeting your return objectives. Also, quantitative (numerical) data is more consistent than qualitative (non-numerical) data and can be easily compared and analyzed.
Next, many retail investors still rely on portfolio managers or traditional brokers to make investments. Quantitative REI, when paired with an efficient model, can help you decrease your costs since you do not need intermediaries anymore. Yet, it is important to know that your investment decisions will be as good as your model and your data.
Quantitative analysis uses only historical data, so you can create a more precise strategy aligned with your investment goals. It is easier to invest in assets that match your risk appetite, and you can easily predict your returns. Also, it is less time-consuming since a computer will make all the transactions on your behalf.
The main reason why quantitative real estate investing works is because it is objective and discipline-based. If your model is correct, the computer will be able to exploit market inefficiencies using quantitative data, such as debt-to-equity, P/E, or thousands of other inputs at the same time.
Another benefit of using computer-based investing is that it is capable of analyzing an impressive number of investments at the same time, while the traditional retail investor or even professional can analyze only a few of them simultaneously. Once the model analyzes the options, the screening process will leave you with a curated, well-ranked list of real estate assets worthy of your hard-earned cash. This makes it extremely straightforward and ideal for investors regardless of their financial or accounting knowledge.
Trends surrounding data-driven real estate investing
Another important aspect when it comes to quantitative strategies is that they are virtually unlimited. Unlike humans, who are able to handle only a certain amount of information at a time, computers can use the exponential growth of alternative datasets to improve investment decisions.
Hedge funds have already been using alternative data for decision-making purposes for many years now. It is also quickly expanding to retail, logistics, and energy, and other industries. Investors’ growing interest in reaping the benefits of large datasets led to the emergence of machine-learning methods or computer-led mathematical models that are able to analyze this information.
Although leveraging computers and AI to run quantitative real estate investing may seem futuristic, early adopters enjoy major advantages. In 2018, Cambridge Analytica was rumored to have collected information from millions of Facebook profiles to support Trump’s presidential campaign. This is proof that investors who use alternative data can identify events and act on them before everyone else – simply because humans are inefficient when it comes to analyzing large sets of information compared to computers. Those able to use quantitative real estate investing strategies can easily identify market inefficiencies, resulting in excess returns.
Real estate investments can provide a steady fixed income as dividends and help you build wealth via capital appreciation. Still, with so much information available nowadays, choosing the right assets can be extremely difficult, especially when humans tend to make emotion-based decisions. Quantitative real estate investing is one way of removing the human factor, leading to higher returns.