“If you don’t find a way to make money while you sleep, you will work until you die.”
— Warren Buffett
Our company has over $250 million in multifamily real estate assets.
People are surprised when I tell them I’m not really emotionally attached to multifamily.
Real estate is good, but I don’t have a deep eternal love for it.
BUT, It’s definitely done a lot for me!
But it really doesn’t matter whether you invest in self-storage or multifamily or Bitcoin.
The asset doesn’t matter but rather what the asset does for you.
What are the returns?
What are the tax benefits?
What happens during a recession?
Don’t fall in love with the deal; fall in love with the numbers.
If you’re looking at just one asset, it’s important that you have an open mind to see what else is out there.
Let’s look at some options!
1. What Investors Think
Most investors consider their investing options.
This is generally what I do.
What I’ve learned after over 1,300 calls with investors is that people are biased.
They like sticking to what they know.
But it doesn’t always make sense in every market to stick with one plan.
It’s good to be open.
Things can work well in one season and the next season they might not work so well.
If you were a bond investor in the last 40 years, you can see on this chart that you would’ve done phenomenally well.
The rates on bonds have gone down consistently over time.
The older bonds continue to be worth more as bond values go down.
Bonds are not that great anymore.
They’re struggling.
Rates are rising and that decreases the value of bonds.
Interest rates are also rising in single family.
At the time of this blog, a 30-year fixed rate is 7%.
If you had a $500,000 house, a year ago you may have had a 30-year fixed rate of 3%, including escrow.
That means you’d pay around $2,353 per month.
If the rate is now 7% that means you’d pay $3,328, which is a thousand-dollar increase.
That’s a 41% higher payment than you were paying a year ago!
With that information, is single family a great place to invest?
Right now, I’m not seeing rents rise by 41% in a year.
They’ve risen, but not that much.
What happens if rates skyrocket in the future?
That’s why multifamily still looks attractive to me.
People who want to buy houses either aren’t able or don’t want to due to the high interest rates.
Where will they go?
They’re gonna go to multifamily.
They’re gonna go to rentals.
Remember: It’s important to look at the asset.
What does it do for you?
Does it reduce taxes?
Does it give you other benefits?
Let’s take a closer look at these questions.
2. What An Asset Can Do For You
What does an asset do for you?
To answer this question, the first thing you want to ask yourself is:
What are your goals?
Are you looking to retire in two years?
In that case, maybe cash flow will be important to you.
Are you looking to grow your retirement account or cash account?
Is your time horizon not as important?
Maybe appreciation will matter more.
If you have a great asset but it doesn’t really get you where you want to go, then it’s not really helping you.
It needs to be a match between those two.
I’m going to use the example of multifamily to show how you can find that match.
There are some incredible benefits to multifamily.
First is the inflation hedge.
This chart from Mother Jones shows that the line between rents and inflation is almost completely correlated.
That means if I own the asset, there will be an inflation hedge.
The hedge will generally match what rents are doing and what inflation is doing.
If inflation is high, rents will continue to rise, which leads to valuations.
Rents rising also means that the value of properties such as multifamily typically will rise.
You can see why I love that inflation hedge component!
There are also tax benefits for multifamily.
You can defer or, in some cases, eliminate taxes.
We typically put down 20% to 30% downpayment for these deals.
We don’t need to double the value.
We just need the property to go up 20% to 30% because that’s how much we put down on the property.
With that, you can double the equity on the property.
The ability to be debt levered is huge.
In terms of cash flow, multifamily actually pays you to hold it.
I invest in precious metals, which are great, but they don’t pay you to hold them.
With metals, you’re using the asset as a hedge.
There’s no cash flow.
Multifamily offers cash flow.
It also generally offers higher returns than the stock market.
There’s a lot less volatility than the stock market as well.
These factors make multifamily a great fit for most investors.
But you may have a special situation!
That’s why it’s really important to define your goals.
When you do that, you will find the right assets.
3. How to Evaluate an Asset
While evaluating an asset, you have to look at the downside.
Don’t just look at the positives.
You could be overlooking some serious downsides.
Warren Buffet famously said: “Rule number one of investing is don’t lose money. Rule number two is don’t forget about rule number one.”
Whatever you look at, find the downside, because losing money will slow you down.
I’m not saying you shouldn’t lose money.
Every investor will lose money at some point.
There’s an example of an investment I’m currently looking at in the energy space.
The investment has a potential of 100x to 300x.
Every dollar invested could potentially become $100 to $300.
For this, I see the downside as maybe a breakeven or small loss.
To me that’s an asymmetric return.
There’s a low downside and a super high upside.
What is an acceptable risk to you?
Where does that fit within your portfolio?
Personally, I think having 5% to 10% of your assets in something speculative that has the potential to go 10x or 100x could be a huge win.
That could be life changing!
We have an ATM machine fund to supplement our multifamily portfolio.
It’s a different type of investment with higher returns.
There is no financial leverage.
It works well for retirement accounts.
When you’re diversifying your investments, make sure to read the PPM.
Read the statements.
Sometimes they’re long and tedious, but you have to look for the risk factors.
Make sure you understand how something could go wrong.
Don’t just look at the asset; look at the numbers.
See if they make sense for you.
Now I want to hear from you!
What assets are you investing in?
Did you find any risks or downsides while doing your research?
Let us know in the comments below!
Before you leave, make sure to check out our special report about inflation investing. It shares the best choices to invest during an inflationary environment.
If you are interested in investing with us, we are happy to answer any questions that you may have. Join our investment club today and we will be in touch.
Disclaimer: I am not your investment advisor. This is for educational purposes only. I am not giving specific advice on what you can do. I am simply giving my opinions.
