What’s the single best investment you can make for 2020 — and the 2020's?

The answer has been the same for 150 years.

Originally posted Jan’20– It’s a new year and a new decade. For investors, it’s a time to think about your investments and savings for retirement. What can you can do right now that will have the greatest impact your financial future? Is there a company or companies who stocks are poised for a decade of big gains? Or a certain sector destined to take-off? Perhaps. But, there is a more certain and safer path to improving your long-term wealth.

An Overlooked Asset

Diversify. Diversify. Diversify. We’ve all heard this many times. Yet most investors typically hold just two asset classes: stocks and bonds. In this scenario, what often passes for diversification is merely diversification within the same asset: i.e. holding international equities or corporate bonds along with municipals. Yet there is a third major asset class that most investors miss; and that’s commercial multifamily real estate. This often overlooked opportunity can provide investors greater diversification and also deliver strong returns even in the face of a potential drop in stock prices.

“Stocks will bring you highs, but periodically will seriously let you down. Treasury bonds will keep you safe, but they won’t make you rich. Housing? That’s the best of both worlds.” — Quartz’ Dan Kopf on the findings of a new study

Multifamily Real Estate: “The Perfect Investment”

Many high-net worth investors and financial experts consider real estate to be the ideal investment — specifically commercial multifamily real estate. Unlike your home, commercial real estate is a true investment owned for the primary purpose of appreciation and financial return. What makes real estate ideal?

Commercial real estate offers investors a number of attractive benefits compared to stocks and bonds. These include a greater annual income, favorable tax treatment, and more favorable risk-adjust returns. Even further, commercial real estate returns have a low correlation to these other assets, so it’s an excellent way to diversify. Real estate can even serve as a hedge against inflation should interest rates and prices continue to rise.

Multifamily, which is another way of saying large apartment complexes, is considered to be the safest, most stable and predictable class of commercial real estate. A recent book on the subject referred to it as The Perfect Investment[1]. What’s more, this isn’t a short-term opportunity. In fact, according to a 2018 study housing has been the world’s best investment for the last 150 years.

Where is the Best Place to Invest in 2020?

From many investors perspective– including myself — the answer is clear: multifamily real estate. Conveniently for investors, these properties can be invested in passively through firms that specialize in acquiring and managing this type of asset. Specifically, I like the investment model and track record of OpenPath Investments. Full disclosure: I have been OpenPath investor/partner since leaving Google in 2007.

10 Years of Market-beating Results.

OpenPath Investments is a social impact real estate company that focuses on acquiring stable workforce housing (i.e. large apartment complexes) in growing, inventory constrained Western US metros and then adding value to the properties and to the lives of the residents — all with an eye on the environment. This short video shows how it works.

Since its inception over 13 years ago, OpenPath Investments has acquired 40 multifamily properties with 17 exits. (We currently hold the other 24, most of which were acquired in just the last 2 years.) Across all of these exits, OpenPath has averaged 30%+ IRR (internal rate of return). Note: our target returns are 13–15%. The average hold for these properties was ~3 years and the average multiple on investor’s equity was 2.0X. How does this compare to the stock market? For the last decade equities have enjoyed the longest bull run in history. Yet S&P 500’s 10-year annualized return including dividends has been just 13.5%. OpenPaths significantly greater returns, underscore the earlier point that multifamily can serve not only as a diversification tool but it can also be the strongest performing asset in your portfolio.

What’s Next?

Does OpenPath expect to see these kind of results going forward? Over the next 10 years we’d be thrilled to match our returns from the last 10 — but we don’t plan for that. Instead we urge investors to focus on our much more conservative projections. Going forward we expect that new OpenPath opportunities in 2020 will deliver an annual return of ~6-7% and total IRR of ~13–15% . These kind of returns exceed the historic averages for the Dow and S&P as well as even the most optimistic forward projections for these stock indexes. The above OpenPath projections are general targets and subject to change based on the information we have at the time of any specific investment. As always, OpenPath will provide more details and proforma projections for specific opportunities/properties as these come available.

“By standard measures of uncertainty, housing was about half as risky as equities, and slightly less risky than bonds.

The reason these findings are so remarkable is that they fly in the face of economic theories of asset valuation, which suggest risky assets like stocks should have higher returns than stable ones like housing. But that’s not so” — Quartz

A couple other posts that I think you will like:

“My Next Google: A perspective from employee 75”

“Real Estate’s Long Boom: Experts See Decades of Opportunity”

Note: OpenPath investment opportunities are for accredited investors. I am not a CPA or professional financial advisor. All opinions are my own. I encourage you to consult your accountant to fully understand your individual tax situation.

[1] The Perfect Investment by Paul Moore was published in Aug 2016