“The golden era [of stocks and bonds] has now ended,” says a McKinsey & Company report issued last year.
The report suggests that returns on equities and fixed-income investments could see significant decreases – up to 400 or 500 basis points over the next twenty years. According to the report, this will affect everybody, from pension funds that will face larger funding gaps; asset managers who will see lower fees; and insurers whose earnings depend on investment income. And on a personal level, the new generation of retirees will retire later and with less income.
And more recently, Bloomberg reported that “U.S. markets are at their highest risk levels since before the 2008 financial crisis… according to Bill Gross, manager of the $2 billion Janus Henderson Global Unconstrained Bond Fund.” The article continues, “Gross said that ‘…returns are going to be lower.’” These thoughts are echoing throughout the industry.
To prepare for the new era, investors are looking at alternatives. Many are choosing real estate. And with good reason. In fact, as far back as 2012, a JP Morgan paper suggested that real estate is no longer an alternative, but rather a “way out.” “An alternative no more.” Just look at the endowment portfolios of major academic institutions, led by Yale whose successes are legendary. Yale has allocated 12.5% of its investment to real estate.
Maybe it’s time for you to consider diversifying your investment portfolio by adding real estate. Why?
Reduced Volatility
Real estate is stable, unlike the stock market that reacts to every nuanced whisper in politics or the economy. It is not correlated to the stock and bond markets. Real estate offers a steady, reliable return. Studies show that, by adding real estate to a mixed portfolio, you will see an increase in returns and, perhaps even more important, a reduction of risk based on return/unit of risk.
I’m not talking about a REIT. A REIT is like a stock; it goes up and down with the equity markets. I’m talking about a direct investment in private equity joint venture or a fund.
Cash Flow
Cash flow is the key. You should receive, at the very least, six-plus percent annual return on your investment. Our goal in today’s market is yield – a reliable, on-going cash flow return.
And this is not about short term. The days of “fix and flip” passed us a couple of years ago. Now, we hold our properties for several years while enjoying the steady cash flow and substantial appreciation.
We factor anticipated inflation into our underwriting projections. We expect an increase in expenses, and we project an increase in rents to cover them. Remember, real estate is a hard asset. As new construction costs increase, the cost of replacing the existing structure also rises (along with its value) creating yet another potential hedge against unanticipated inflation.
When you get your money back, it is treated as capital gain, a favorable tax rate.
The Private-Equity Real Estate Fund
We like funds. You will, too. But it is important to focus – and to focus on an asset class your partner knows and understands.
Focus
At Lloyd Jones Capital, our focus is middle-income housing. It’s what we have been doing for years. According to virtually every demographic study, the supply will never catch up to the demand.
And we focus on Texas and the Southeast, home to ten of the 15 fastest growing cities plus seven of the ten “best cities for job growth.” We like to be where the people like to be. Plus, we have existing operations throughout these markets.
Diversification
We like funds because you can spread the risk among various properties and geographic markets. A disappoint-ing performance of one asset will not affect the others. In fact, the others will most likely compensate for it.
We like eight to ten properties in four or more different markets for maximum diversification. We have operations in every market we serve, and our local presence gives us tremendous advantage in finding, acquiring, and operating properties within these territories.
Stand-Alone Entities
Our fund structure allows us to hold our investments property by property. Each one operates as a separate business. There is no cross-collateralization. A market slow-down in one area will not affect the other properties. We prepare a business plan for each specific property, and we can choose individual hold terms and disposition times.
Alignment of Interest
We believe in our investments; we are thoroughly committed to them, so we participate financially in every one, alongside our investors.
So, what’s an investor to do?
I suggest that we all heed the words of today’s best-known economists and be prepared for the unknown future of the equity and fixed-income markets. It would be wise to diversify your portfolio with multifamily real estate. Private-equity real estate offers protection from stock market swings and a hedge against inflation. It provides a steady cash flow, appreciation, and great tax advantages. What other asset class can say that?__________________________________________
About Christopher Finlay
Christopher Finlay is chairman/CEO of Lloyd Jones Capital, a private-equity real estate firm that specializes in the multifamily sector. For the past thirty-seven years, and through every economic cycle, he has owned and operated successful multifamily businesses. Predecessor companies include commercial brokerage, appraisal, property and asset management, construction, and development.
Headquartered in Miami, Lloyd Jones Capital acquires, improves, and operates multifamily real estate in growth markets throughout Texas, Florida, and the Southeast on behalf of institutional partners, private investors, and its own principals.