Last week’s stock market roller coaster ride serves as a good reminder of why it is so important to maintain a diversified investment portfolio. What impact did it have on investment real estate? Absolutely none.
This is why income-producing multifamily real estate makes sense for a portion of your investment portfolio. Real estate does not fluctuate with the equity markets. Plus it has out-performed those markets over the past twelve years. Diversify. Dilute the volatility.
This is how most of the very wealthy individuals have created their wealth. It is said that 90% of the Forbes 400 Index have made or maintain their wealth in income-producing real estate.
Some say you should have 5 to 10 percent of your portfolio in real estate. But I advocate 15 to 25 percent. Yale University’s legendary endowment fund, which has consistently out-performed its counterparts, allocates 17.6 percent to real estate. (Average endowment commitment is only 4.2 %.)
The University’s Endowment Report 2014, reads “Investments in real estate provide meaningful diversification to the Endowment. A steady flow of income with equity upside creates a natural hedge against unanticipated inflation without sacrificing expected return.” That policy has obviously worked well for Yale. Its endowment generated a 20.2 percent return in fiscal 2014.
And in the asset class, multifamily is a top choice. The demand for housing is huge. We all need a place to live, but fewer people are buying homes. Home ownership has declined to the lowest level in 50 years. The U.S. homeownership rate fell to 63.4 percent in the second quarter of 2015, according to the U.S. Census.
- Lack of cash down payment
- Burden of student debt
- Poor credit rating due to housing crisis.
- Delayed marriage and children. (triggers for buying a home) Birthrates for women in their 20’s dropped by 15 percent from 2007 to 2012. Millennials are now the slowest of any generation in US history to have children. (Urban Institute Report, April 28, 2015.)
Furthermore, many people are now renters by choice.
- Flexibility to relocate for job opportunities
- Appeal of a low-maintenance lifestyle
- Abundance of lifestyle amenities an apartment community provides
- Recognition that a house is not an investment
And down-sizing Baby Boomers are on their way. It’s estimated that we’ll see 12.2 million renters age 65 and older within the next fifteen years. That’s on top of the 25 million Millennials (typical renters) who are still living at home. That’s a huge pent up demand.
So my advice? Diversify. Invest in carefully selected multifamily properties. But be careful, because there is a buying frenzy right now. (You can understand why.) Lloyd Jones Capital has many years of experience in finding great opportunities, but it takes a lot of looking. We underwrite as many as 100 properties before we find one that meets our criteria. So you have to be patient – but it will be worth the wait.
Christopher Finlay is Chairman/CEO of Lloyd Jones Capital, a private-equity real-estate firm that specializes in the multifamily sector. With 35 years of experience in the real estate industry, the firm acquires, manages and improves multifamily real estate on behalf of its institutional partners, private investors and its own principals. Headquartered in Miami, the firm has operations throughout Texas, Florida and the Southeast. For more information visit: lloydjones.wpengine.com.