I have no intrinsic interest in real estate. My interests, in order, are:
capital preservation
stable returns
yield
So why am I here? Because I think unleveraged residential rental real estate in middle America best satisfies my interests. I have researched many investment options including the usual - stocks, bonds, and commodities. None of these meet my needs today and all are overpriced.
I have read books on real estate investment and these books are badly misaligned with my interests. The books advocate leverage to increase yield at the expense of risk to capital preservation. They assume active real estate investing when I have no interest in this.
When I invest in stocks, I buy mutual funds. I have neither the interest nor the knowledge to pick individual stocks. So I pay an expert, the mutual fund manager, to do this. Why isn’t there something analogous to this for residential real estate? This is what I want. Yes I know the standard real estate options like REITs and real estate operating companies. These generally have leverage, aren’t restricted to residential real estate, and aren’t nearly as transparent as a mutual fund. So they don’t satisfy my needs.
Any suggestions to solve my investment dilemma would be greatly appreciated. Note, I have posted this to several forums but I am still looking for an answer.
fschmidt,
I don’t know of any unleveraged real estate investments per se. That’s not to say there aren’t any. I am currently doing a similar investigation. If you find anything please be sure to post an update.
For conversations sake I’ll throw in some ideas. I would recommend talking to a fee based financial planner who works with high net worth clients. I would make sure that they are not tied to a particular investment company and can recommend investments from a multitude of sources. There is another world of investing that the majority of people are unaware of.
Passive:
Anyway, There are a number of “Absolute Return Notes” which are supposed to be good for capital preservation. However, because the downside is eliminated the upside is extremely limited. If the stock market goes up 10%, you’ll be lucky to see 3%. This probably won’t keep pace with real inflation. And, If the stock market goes down, you’ll have zero gain and zero loss but in the end be loosing do to inflation.
You may want to look into buying notes from other governments in their currency. I have friends who have purchased notes in the Turkish Lira and Brazillian Real. If I’m not mistaken they can be bought in $25K denominations. The idea is that in addition to the yield of the note, you will try to capture a gain from the currencies exchange rate with regards to the dollar. There is exchange risk with these investments. If the dollar is strong relative to the foreign currency the percentage increase will go against you.
If you were taking an Active part in your investing you could:
Invest in Tax Liens
Private Money Lending to Real Estate Investors
Hard Money Lending
All of these require some education and expertise and can be profitable when done correctly.
jfpen, thank you for your advice. I spoke to a financial adviser at Northern Trust, where I bank. They deal with high net worth clients. He couldn’t think of any investment that fits what I am looking for, and he is familiar with private equity investments.
The other investments that you mentioned all have inflation risk that I don’t want. Foreign currencies have risks that I can’t accept without fully understanding the country. If I were to consider investing in Brazil, for example, I would want to learn Portuguese and live in Brazil for a few months to understand what I am getting into. So this isn’t a practical option. In comparison for foreign currencies, real estate is much easier to understand.
If I can’t find a fund that meets my needs, I would consider starting one with someone who is motivated in the real estate field. In that case, if you are looking for something like this, you could also invest in this fund. But I will report back here whatever I find.
The “investment” that best meets your criteria might just be at your local or regional bank. Small local and regional banks have CD rates that beat the US Treasury. are FDIC insured, and have a constant return over the entire term.
Capital preservation, stable return, and yield better than US Treasury rates. What other “passive”, unleveraged investment meets all your criteria as well as bank CDs?
I agree, but inflation protection was not listed as one of your criteria. If you want safety in the form of capital preservation, stable return, and a guaranteed yield in a “passive” investment, then you have to sacrifice inflation protection.
Mitigate the inflation protection risk by buying short to mid term CDs. Consider laddering 1 or 2 year CDs.
By “capital preservation”, I mean preserving the value of my capital, not preserving little pieces of paper. Short term CDs don’t address the risk of high inflation.
My point in this thread is that unleveraged residential real estate is the best investment for capital preservation. What is missing is a reasonable way to do this passively.
It’s easy to find good unleveraged passive investments in real estate. Just buy cash-flowing rental property with cash and hire a property management firm to manage them. The only drawback is you need lots of cash to begin with.
An awful lot of US homeowners will disagree with you. Over the past few years, many homeowners across the country have seen their property lose as much as 50% of its value. Capital preservation is not guaranteed with real estate.
homeslice, yes just buying rentals does work but feels like buying stocks at random. I would rather have someone who understands real estate select rentals to buy than for me to buy them at random.
Dave T, those homeowners only lost if they sold. And of course if they overpaid then they lost at the moment that they bought. The real value of property isn’t determined by what the idiot masses are willing pay at the present moment. It is determined by calculating the value of the cash flows that the property could generate as a rental.
christopher w, REITs are passive but all REITs that I know use leverage. If you know of an unleveraged residential REIT, I would buy that.
I totally agree, but this is simply the yield – your third criteria. Even if those homeowners I referred to never sell, there is no guarantee that their property will ever recover the value that has been lost. If they are now upside down, the asset did not preserve its owner’s capital and certainly did not hedge against inflation.
If they are upside down, that means they took a loan which is no way to preserve capital. If someone just overpaid with cash, then they lost whatever they overpaid at the time of purchase, but that should be all they will lose.
I make the majority of my big returns in the “business world”, but I also invest in non-leveraged real estate and make good returns too.
So it definitely can be done.
My minimum return from real estate is 20% and I make upwards of near 40 or even 50% on my better properties. I follow the teachings of Lonnie Scruggs, who can get 100% +/- yields on mobile home notes and 20% +/- on mobile home lots…all 100% unleveraged and little to no risk. But I invest in single family, lower income and middle income homes.
I think even if you found a public REIT or the equivalent it wouldn’t give those kind of yields whatsoever.
There are ways you can get larger (20% or bigger) yields and take a more hands off approach, yet be unleveraged. A couple examples include becoming a hard money lender, or becoming a limited partner in an apartment complex rehab project.