I recently spoke with an investor who said something that I have heard many times: “I can make 4% in a safe, conservative investment. So in order to invest in real estate, I need to do a lot better. I want a 7% cap rate. Otherwise I can’t justify moving my money.”
I don’t have a response to that for several reasons.
Still, we are on the west coast in a rather fashionable urban center where a duplex on the busy thoroughfare of Monterey Boulevard in the middle of the holiday season just sold for $789,000 (3% cap rate at best); and where an eight unit building on Union Street with an old boiler and no parking just sold for $1,900,000 (4.4% cap rate at best). I wrote three offers in three weeks and all were multiple offer situations. It seems that real estate must still be attractive on the west coast.
Add just a bit of leverage, talk with your CPA about depreciation and expense deductions, and somehow other benefits of owning real estate begin to shine through.
I think what’s the real stumbling block for some investors is that they are just not comfortable with real estate. That’s usually true for those who prefer stocks and bond investing. Real estate investors seem to cross over to stocks and bond investing easier. The very wealthy always cross over both ways because they need to diversify.
Our recession is a great illustration of diversification. During the darkest period around early 2009, equities lost between 30% and 50% of their values. Many real estate portfolios were hit just as hard.
Here is the difference: If you owned five multi-family buildings that were worth $10,000,000 in 2007 and only $6,000,000 today, you still received rent checks every month. Your vacancy rate may have gone up (and then down this year). You might have given some tenants temporary rent reductions. You may have finally had to spend some money remodeling to make your units more attractive. Still you had a pay check every month and the drop in rents never reached the huge paper losses of value.
A good friend and client met with a team at Merrill Lynch last week. They wanted her to move her portfolio to them. They showed her a lot of charts and told her that she would get a 6% return with them. She asked if they could guarantee that. Their reply: when other portfolios lost 20 percent, they only lost 10 percent.
Where’s that rent check……