Where the Smart Money is Headed Now

As the Stock Rally Comes to an End, Here’s Your Next Move

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Now in its ninth year, the bull market is finally starting to show real signs of fatigue. Recent market volatility is a sober reminder that markets don’t move in only one direction and that all good things must come to an end. Is there room for further gains? Perhaps. Earlier this year a round-up of 12 Wall Street strategists found almost all the experts are still bullish on US equities in 2018. However, many strategists while still optimistic, warn of regular pullbacks throughout the year and expect a level of volatility. We’ve already begun to see this. Despite these positive viewpoints, most investors believe we are in the late stages of this current cycle. Which begs the question for growth oriented investors: are there any viable alternatives to stocks?

Diversify. Diversify. Diversify. We’ve all heard this many times. Yet most investors typically hold just two asset classes: stocks for growth and bonds for safety. When the stock market climbs upward for 9 years this strategy works just fine. But what happens when it doesn’t? Right now might be the perfect time to consider a third asset class that most investors miss; and that’s commercial multifamily real estate. This often overlooked option can provide investors greater diversification and 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 higher annual income, favorable tax treatment, and more attractive risk-adjust returns. Still further, commercial real estate returns have a low correlation to stocks and bonds, 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.

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Commercial real estate historically has generated attractive returns and has exhibited less volatility than public equities. http://bit.ly/RealEstateData

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 of investing referred to it as The Perfect Investment[1]. The opportunity in multifamily real estate isn’t new. In fact, according to a recent study housing has been the world’s best investment for the last 150 years.

From many investors perspective – including myself — the answer is clear: multifamily real estate. Conveniently, you don’t need to be a landlord to take advantage of the benefits offered by real estate. These assets can be invested in passively through firms that specialize in acquiring and managing apartment complexes. Specifically, I like the investment model and track record of OpenPath Investments. Full disclosure: I have been an OpenPath investor/partner since leaving Google in 2007.

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 10 years ago, OpenPath Investments has acquired 30 multifamily properties with 16 exits. (We currently hold the other 14, most of which were acquired in just the last 2 years.) Across all of these exits, OpenPath has averaged a 31% IRR (internal rate of return). 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? Over the same time period the S&P 500’s 10-year annualized return has been just 7.20%. OpenPath’s significantly greater returns underscore the earlier assertion that multifamily can serve not only as a diversification tool but it can also be the strongest performing segment of your portfolio.

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 2018 will deliver a annual return of ~7% and total IRR of ~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. For each investment opportunity OpenPath offers we will provide detailed property-specific information and pro forma projections. Let me know if you like to learn more.

“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

Written by

Investor, Partner, Advisor. First Google Advertising Exec (2000–07), ex-Chicagoan. Now at OpenPath Investments & FullCycle Climate Partners

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