Investors around the globe are investing more in U.S. safe havens, which is driving down bond yields, as interest rates continue to plummet due to a global trade war that has been ongoing and growing, and the expectation of slowing global growth. The Federal Reserve chas recently reduced interest rates. This is good news for the growing national debt, but it hurts those who are unable to work or retire on a fixed income. This article explains why some investment strategists are now over weighting real estate and decreasing bond allocations. Yield-hungry investors should look closer at real estate. The article mentions that Real Estate Investment has outperformed other investments over the years when interest rates are reduced. Investors have received cash on cash returns between 7 and 8% consistently, with a preferential return of that range. We are a syndicate that has been involved in more than twenty multifamily deals in the United States. Investors can receive up to 8% before the general partners in multifamily deals receive their profit split. Preferred returns are cumulative. This means that even if there’s a downturn in one year, the preferred returns will catch up when there’s a capital event such as a refinancing, eventual sale, or similar. The preferred position provides safety.
A multifamily deal in Austin offered two classes to investors. This was an alternative to the one-class for all model that is more common. It allowed for a higher yield and more security. This offering was 25% dedicated to income investors looking for higher yields. For a maximum of 5 to 7 years, the return expectation is 10% cash-on-cash annually. This is a preferred equity position (Class C) over the growth investor. In exchange for 25% more growth, you will have to give up some cash flow from the deal. You can read my previous blog about that strategy.
It is also an equity position, so all tax benefits flow through the limited partner Class-A holders. This almost resembles a pretax 12% to 13% return. This is a great investment strategy because it offers a preferred position, double-digit returns, tax benefits, and low risk. We’ll talk about risk, as most bondholders add bonds to get some income and safety. The data support a strong, secure confidence in the ability to achieve that 10% preferred return, regardless of the risk. In our case, we can see that Austin had a vacancy rate of 5% in 2009, just 1% higher in 2009. It hovers around 5% in a healthy market. Our model stressed tested vacancy up to 20% (2x the 2009 crash). It showed sufficient room to support the 10% yield (4.5% cashflow at 20% vacant and 2.5% cashflow to pay 10%). This model is only applicable if Class A equity does not exceed 25% of the equity stack (raise).
In order to receive their first payout, Class A (growth investor) has a preferred return rate of 10%. If we distribute less than this amount in any year, the 10% cumulative would be repaid later. The downside market protection has been proven to be effective for apartments. In 2009, less than.5% of all MF owner were serious delinquent in repaying their property debts. Single family homes were at 4.5% (insert graph). This is a powerful reason to invest in this niche. We looked for yield and the safety that you want from bonds.
For those who are not familiar with traditional bonds, you might consider Investing in Real Estate as a source of income and safety. This could be in the form of preferred equity positions, hybrid debt, or equity kickers that are backed by income-producing real estate. Look for strong local markets with a high population and jobs. Operators who are conservative and experienced in their assumptions and underwriting and who focus only on one niche such as MF apartments, which have a track record of performing well during downturns, are the ones to look for.