Between family, medicine, and commercial multifamily real estate, I have very little time to watch TV. However, since college I?ve become accustomed to falling asleep with the television on. Knowing this, my wife has taken the opportunity to work in a few series for us to watch together before falling asleep.
Recently, her show of choice was something called Married At First Sight. The premise of this reality show is to marry strangers and follow them with cameras for six weeks afterwards. Basically, it is a televised arranged marriage. The couples literally see each other for the first time as the bride walks down the aisle.
Of the three couples we watched, only one had instant mutual attraction. They seemed well matched and their affection grew over those early weeks.
As for the other two couples, it wasn?t love at first sight. Both husbands seemed happy with their wives, but the ladies were not feeling it. One of them decided from day one that she had made a mistake and never opened herself up for any other possibility. The other one acted out initially, but over time realized that she was well matched and real affection for her husband grew.
Looking back on the episodes, it was kind of a train wreck. Despite that, I couldn?t help but watch. It did, however, get me thinking. What if we could only invest in one asset class for the rest of our lives? While I know what investment I?d want to be married to, the truth is that most investments have their advantages and disadvantages.
With that said, let?s take a look at the top three marriage material investments.
Stocks are paper assets that represent an ownership stake in a company. The problem is that investing in individual stock (a single company) is far too risky. Simply put, they are just not marriage material. Because of the risk, most investors would prefer to just date and play the field liberally.
If you had to marry this asset class, than your best bet would be polygamy. That is why mutual funds were created. Mutual funds are a vehicle that allows one to invest in multiple stocks and therefore spread their risk out amongst multiple companies. This is called diversification. While this approach reduces the risk of owning individual stock, mutual funds still tend to be much riskier than bonds and commercial multifamily real estate.
Given the level of risk, it?s easy to see that it will be a volatile marriage for sure. There will be a lot of highs and lows, much like riding a bumpy roller coaster. For that reason, people highly value liquidity. They want to be able to get out immediately should things go south. Unfortunately, that cherished liquidity often works against them leading to lower than expected returns. There is a cost to liquidity that many people don?t consider. This effect has been well documented by DALBAR in their annual Quantitative Analysis of Investor Behavior.
Bonds are also paper assets, but represent a loan to a government, municipality, or corporation. The volatility of bonds is significantly lower, but so are the returns. Couple these stable, but anemic returns with the counter effect of inflation and the likely result would be an inability for a portfolio to grow significantly enough to ever support retirement.
Getting hitched to only bonds would be something like being stuck in a loveless marriage.
Yes, bonds can be very stable, but their lower returns make them better suited as an adjunct and not the mainstay of a portfolio. They can help diversify a portfolio heavy in stocks and smooth out some of the volatility that comes with stocks.
Bonds can provide cash flow, known as yield. Yield is nice as it can supplement your income or replace some of it so that you can buy back time and work less. Unfortunately, the yield from bonds has an inverse relationship with value. In other words, if value goes up, than yield goes down and vice versa. Given that fact, investment timing is still a critically important piece of the bond puzzle. Imagine investing for yield, only to find you need to sell before the bond matures and it?s worth far less than what you paid for it. It happens more often than you?d think.
- Commercial Multifamily Real Estate
Unlike stocks and bonds, real estate is not a paper asset. You can see it and touch it. It is a physical building. There is no efficient secondary market in which you can exchange it or trade it over the counter. As such, it can have its challenges with liquidity. Given this fact, it is wise to have some liquidity in other accounts or invest in a way that liquidity is built into the investment.
Expertise matters when it comes to investing in commercial multifamily real estate. Real estate is the only asset class that can provide returns in four different ways. As such, the investor can realize growth like stocks and yield like bonds. By utilizing safe leverage, it is pretty common to achieve higher returns than those seen with stocks and bonds. In experienced hands, leverage is a wealth accelerant. It?s considered one of the safest investments available, as reflected in the lending market. AAA rated life insurance companies and the smartest lenders in the world are willing to provide non-recourse (the asset is the only collateral, not your personal credit) loans almost exclusively to stable multifamily real estate.
Being able to achieve yield without sacrificing growth is special. Real estate typically provides much healthier cash flow than bonds and without the inverse relationship of bonds. In other words, as the value of the multifamily real estate goes up, so does the yield.
Commercial multifamily real estate is the goldilocks bride for me. Not too crazy volatile like a Kardashian and not too cold like a marriage without any passion.
No matter what your investment bride of choice, the good news is that we aren?t limited to just one investment class. Whether your prefer stocks or bonds, you can diversify your portfolio, bolster your returns, and lower your volatility by adding commercial multifamily real estate to your portfolio.
To Your Wealth!
Dennis Bethel, M.D.
P.S. ?To learn more about commercial multifamily real estate investing, download my free report Evidence Based Investing: Why Every Health Care Professional Should Consider Commercial Multifamily Real Estate Investing.