Do you ever wonder what happens to the money you send in? How do the insurance companies keep it safe in order to pay out death benefits?
Did you know that AAA rated life insurance companies love commercial multifamily real estate?
For those of you who are new to this blog, I do too.
One of the reasons we both invest heavily in this asset class is due to safety. While all investments have risk, some are riskier than others. Personally, I prefer to minimize risk and maximize return. I believe that the number one rule of investing is, “Don’t Lose Money.” Said another way, principal protection is of vital importance as it is hard to grow a dwindling portfolio.
Just like you, life insurance companies have long-term liabilities to fund. In your case, it is your retirement; for them, it is death benefits. Given this fact, they cannot afford to risk their principal.
They have to be smart with their money.
Consequently, their two biggest holdings are bonds (#1) and real estate (#2). The majority of their real estate exposure comes in the form of financing commercial multifamily real estate investments.
The AAA rated life insurance companies do carry a small percentage of stock holdings in their portfolios but it is insignificant in comparison to their real estate exposure. For them, commercial multifamily real estate represents the Goldilocks scenario in which they can obtain better results than their bond holdings without having to take on the significantly greater risk of the stock market.
To quantify the safety of these investments, the mortgage bankers association (MBA) publishes delinquency rates for the five biggest investor groups in commercial multifamily real estate – Fannie Mae, Freddie Mac, Life Insurance Companies, Banks and Thrifts, and Commercial Mortgage-Backed Securities (CMBS).
- Life Ins. Co. = 0.08%
- Freddie Mac = 0.02%
- Fannie Mae = 0.1%
- Banks & Thrifts = 1.4%
- CMBS = 5.71%
These minuscule numbers only continue to confirm the historical data (see graph for the last 14 years of data).
With safety metrics this impressive, is it no wonder why AAA rated life insurance companies love commercial multifamily real estate? You should too.
What do you think? Do you already invest in commercial multifamily real estate? If you do, please share your experience. If not, what is holding you back? Comment below.
To Your Wealth!
Dennis Bethel, M.D.
P.S. Health care professionals frequently ask my advice on investing in commercial multifamily real estate. I also get asked about due diligence and how to evaluate a syndicator to make sure that they are the real deal. These are all very important questions. One of the first thoughts that always comes to my mind is that the lender has already done half of that work.
That is right, you still have half to do, but in the case of Fannie Mae, Freddie Mac, and Life Insurance lenders, extensive due diligence has already been done. Do you think these guys lend to just anyone? In order to maintain that stellar 99.9% to 99.98% payment rate they require strict underwriting standards and strict syndicator standards.
So if you expect AAA rated insurance companies, Fannie Mae, or Freddie Mac to loan you millions of dollars on a non-recourse basis so that you can buy a commercial multifamily real estate building, it better adhere to their strict standards and you better have the experience and track record to convince them that their investment is safe. Novices need not apply.
If you don’t have the experience or the track record, then consider investing in a multifamily project with someone who does.