Traditional investment advice is to hold a portfolio of liquid stocks and bonds. If you contribute to this portfolio regularly, re-invest dividends and hold for the long term you will likely be better off than if you just held cash but there are better assets to allocate your hard earned capital to. Including higher yielding, ‘alternative’ asset classes will make a significant difference to your net worth over time.
If you don’t have investment real estate as part of your overall portfolio it is likely because it wasn’t as easy to acquire real estate exposure as it was to acquire more stock, there were high barriers to entry and it was viewed as illiquid. With stocks forecast to yield 4% a year for the next decade according to John C Bogle, founder of Vanguard group you need to find ways to make your money work harder for you to avoid having to spend your retirement continuing to work hard for your money.
Real estate is, in my opinion, the most advantaged asset class on earth for the reasons below and you can now more readily access this asset class, passively via real estate syndication. But don’t take my word for it, the Yale University endowment has become the standard for a high performing endowment by allocating a significant proportion of its portfolio to alternative assets, including real estate which allowed it to earn a 12.3% return in 2018.
Here is why real estate is such a great investment
- Tax Advantages – the biggest advantage to investing in real estate in the US are the significant tax advantages. You can indefinitely defer paying tax on any realized gains by doing a 1031 exchange, you can withdraw cash tax free by refinancing, you can depreciate the value of the property over time to offset any tax on income generated and if you do sell you can take advantage of long-term capital gains rates.
- Leverage – leverage is readily accessible with real estate since it is a tangible, insurable and cash flowing asset. By using leverage responsibly, we can dramatically increase our cash on cash returns.
- Cash flow – real estate has utility in that it provides shelter and this is something that people are willing to pay for. With investment real estate we only buy deals where the tenants payments cover our financing costs, our principle payments and excess cashflow each month.
- Appreciation – over time the price of real estate increases, broadly in line with inflation which means that even if we do nothing the value of our asset will increase over time. With multifamily apartments we can force this equity appreciation by reducing costs, increasing income and getting a higher valuation based on the increased Net Operating Income (NOI)
- Principle Pay down – Since we typically leverage real estate purchases we must pay that debt back each month. This continuous pay down can result in significant equity buildup over time
- Liquidity Options – you don’t need to sell your real estate in order to realize cash gains, you could do a cash out refinance or you could withdraw cash via a home equity line of credit. The biggest advantage here is that the cash that you withdraw is tax free.
- Competitive Risk Adjusted Returns – according to Investopedia, commercial real estate has outperformed the S&P, delivering a 9.5% return over the last 20 years.
- Inflation Hedge – historically the value of real estate has risen in line with inflation which makes it a great inflation hedge. This benefit can be compounded if you secure long term, fixed rate financing which depreciates in value as inflation rises
- Control – unlike a stock we can have direct control of our real estate asset. We can invest in it to command better rents, get better at selecting tenants, live in it ourselves which means that we get to make more of the decisions which impact our overall return
- Tangible, Insurable Value – Real estate is a physical thing that we can see and touch, it has intrinsic value. As a result it is insurable which means that you never need to be concerned about the value of your asset going to zero. This is not the case with stocks, just look at what happened to Lehman Brothers.
- Diversification – real estate is uncorrelated to stocks and bonds which means that it won’t necessarily go down in value when stocks do. Diversification is a key component of a balanced portfolio in order to reduce risk
If you are an accredited investor and you want to take advantage of the many advantages of real estate you can register for our future deals here