Some people think that doctors and lawyers are like oil and water and just don’t mix.
Personally, I think it depends on the type of lawyer.
Highest on the Schmuck-O-meter is the ambulance chasers. Those of you who have had the displeasure of enduring a malpractice deposition know exactly what I’m talking about.
On the other end of the spectrum is a whole host of attorneys who do a lot of good in the world. I’m grateful for the work that my business attorney, real estate attorney, and estate planning attorneys have done on my behalf.
And then there are criminal defense attorneys. What can be said about them? Fortunately, I haven’t had the need for their services and can’t say that I know any of them. I did, however, have an interesting interaction with one a few months back when I went into the tire center at Costco.
He was first in line for service, but the person at the front desk was busy. He quickly struck up a conversation with me. After exchanging pleasantries he inquired about my occupation. I revealed that I was an ER doctor and he shared that he was a criminal defense attorney.
The conversation was friendly but abruptly came to an end when the guy at the front desk handed me my keys. The attorney and I shook hands and then he said:
“I’d tell you to be good, but that would be bad for business.”
Huh????? Did he really just say that?
What a clever catchphrase farewell I thought. I bet he uses it often.
I got in my car and thought about it some more. What would be an equivalent farewell in the ER?
“I’d tell you to wear your seat belt, but that would be bad for business.”
“I’d tell you to practice safe sex, but that would be bad for business.”
How about one of these:
“I’dd tell you not to run with scissors, play with rattlesnakes, or challenge a professional boxer to a fight in a drunken stupor, because any and all of those would indeed be bad for business.”
Suddenly it didn’t feel so clever; kind of sleazy in fact.
Now imagine the commissioned financial adviser, who says,
“I’d tell you to invest in direct multifamily real estate, but that would be bad for business.”
Unfortunately, that is what many of them are thinking without saying it.
Hopefully you aren’t dealing with one of these people, but if you are, go ahead and ask them what they think about investing in real estate.
If you do, you are likely to get one of two responses:
- Don’t do it, real estate is too risky
- Let me sell you a REIT instead
Without a commission to line their pocket, most will attempt to dissuade you from investing in real estate. This conflict of interest is not in your best interest. Let me show you why.
Mistruth #1: Multifamily real estate is risky
All investments have risk and multifamily real estate is no exception. However, the truth is that commercial multifamily real estate historically has the lowest risk profile of all the different real estate classes (office, retail, industrial, etc.) as well as much of the stock market.
Multifamily is a stable asset class that offers some of the best returns with the least amount of risk. Consider this:
- Multifamily represents an investment in the basic need of shelter
- Multifamily real estate has more up years over the last 75 years than both stocks and bonds
- It has a better Sharpe?s ratio (risk adjusted return) than all other real estate asset classes as well as the S&P 500
- It has less than a 0.3% delinquency (failure) rate on it?s loans
- Is one of the largest holdings of AAA rated life insurance companies
- CalPERS (the largest pension fund in the U.S.) has a significant and ever increasing portfolio of multifamily holdings
Now ask yourself why so many life insurance companies and large pension funds invest heavily in multifamily real estate? Remember that they have guaranteed payouts that must be met. Consequently, they need their money working for them in stable, consistent, conservative assets that provide strong returns at the lowest possible risk. What better asset class than multifamily real estate? After all, it’s an evergreen asset class that cannot go the way of the horse and buggy, the steam engine, Kodak, Blockbuster Video, Border’s Books, etc., etc., etc. No new technology or internet service will ever replace the need for shelter.
When multifamily fails (and again it’s failure rate is less than 0.3%) it’s usually for one of three reasons.
- Inexperienced Operator
- Bad Market
- Inadequate Reserves
Unless you have experience in this asset class, don’t fall into the trap of self-management. Find yourself an operator with a long track record of success. Make sure they are investing in states with favorable landlord ; tenant laws and in markets with current and historical population and job growth.
Lastly, it is critically important to hold money in reserves when you invest in real estate. These reserves can fund capital improvement as well as pay for the unexpected repairs and replacements that are inevitable. Stuff happens, so having reserves that you can draw from is vital in this business.
Mistruth #2 : REITs are the same as direct real estate investing
Commissioned financial advisors propagate this myth all the time. Don’t fall for it.
Public Real Estate Investment Trusts (REIT) are stocks. These paper-based assets focus on the sector of real estate within the market. Investing in them represents a sector play within the stock market and not diversification into physical real estate.
Said another way, REITs are real estate flavored stock. Certainly, REITs have a place in some portfolios. However, don’t let a commissioned financial advisor fool you into thinking you are somehow diversifying into bricks and mortar physical real estate.
Unfortunately, you lose a lot of advantages that come with direct real estate ownership when you invest in a REIT. For example:
- As stock, REITs are highly volatile unlike the low volatility of direct ownership
- REITs are highly correlated to the stock market and therefore do not provide meaningful diversification to a portfolio already heavily weighted toward stocks and mutual funds.
- As stock, REIT investors lose all of the tax advantages that come with direct ownership of real estate
- Due to their high correlation to the stock market, REITs do not offer the excellent hedge against inflation that direct ownership does
Most doctors I know are heavily invested in the stock market – primarily with mutual funds. Those who reach out to me through my blog wanting access to direct ownership in multifamily real estate do so because they want to diversify a portion of their portfolio outside of the stock market for:
- Better returns
- Lower volatility
- True diversification into a physical asset class that is not correlated to the stock market
- Superior tax benefits
Direct ownership can offer all four of these benefits while REITs cannot.
REITs still may have a place in your stock portfolio, but if you are looking to diversify some of that portfolio into commercial multifamily real estate then direct ownership is the place to be.
Sadly, the conflict of interest that comes with commissions frequently preclude financial advisers from telling you the truth about this asset class. It simply isn’t in their best interest.
If you want to learn more about direct ownership in commercial multifamily real estate, download your free copy of Evidence Based Investing.
P.S. Have a question about commercial multifamily real estate investing ?Contact me at this link.
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