Podcast Episode 84:
“Why the Ultra-Rich Like Real Estate.”
Investing has its ups and downs. Real estate has some definite advantages in smoothing out the bumps. Ultra-rich people usually have some properties in their investment portfolios in order balance out the volatilities of stocks. Even if you’re not wealthy (yet!), the same advantages sought by the ultra-rich also apply to any investor.
Advantages of Investing in Property:
Why The Ultra-Rich Like Real Estate
Tougher economic times make us question why we invest in real estate. Your property values may be going down, tenants are harder to find, and nobody knows if the price of oil is coming back anytime soon. Perhaps some of your friends are being foreclosed on. For a lot of people in provinces that depend on oil for commodities, these are not necessarily pleasant times.
When there is chaos all around, sometimes it’s beneficial to take a step back and revisit the reasons why we think real estate is a great investment.
Better yet, let’s take a peek at why the ultra-rich (let’s define ultra-rich as people have $10 million plus to invest) like real estate. Ultra-rich folks are ultra-rich for a reason. They make investments that are good over the long haul and that don’t lose them money. Let’s discuss this further. As a starting point, here’s what Simon Jochlin of StennerZohny Investment Partners (part of Richardson GMP in Vancouver) had to say[i]:
“Real estate is generally accepted as an alternative investment. It has the characteristics of an inflation hedge: yield, leverage, and capital gains. It does well in upwardly trending markets, it pays you to wait during market corrections, and typically it lags equities in market declines—it buys you time to assess the market.”
Think about that… yield, leverage, and capital gains. In other words, your money is working for you and paying what is effectively an interest rate on capital invested, you might have to only invest 20% of the value of a piece of property and, when you sell, you get preferred tax treatment by paying only capital gains. What’s not to like?
What about the other three factors? Yes, in upward trending markets property values go up; in downward trending markets, properly purchased and managed real estate does pay to wait. Property values may not be moving up anymore but you can still have low vacancy and positive cash flow. You can afford to wait. And since ultra-rich investors also invest in the stock market, they note that where the stock market can bounce up and down frantically, property values are much more stable. Trends are shallower, giving you time to really think about your investment.
Darren Coleman is a senior vice president and portfolio manager at Raymond James LTD in Toronto. He argues that, “real estate is very popular and one of the reasons, in my opinion, is that investors can actually see and touch their investment.” Mr. Coleman also thinks that real estate investors, whether they fit in the ultra-wealthy or perhaps have a little less money, are actually more logical than stock market investors. He says:
“For example, if you own a rental condo, and the one across the hall goes on sale for 30% less than what you think it’s worth, you wouldn’t automatically put yours on the market and sell too because you think there’s a problem. Indeed, you may actually buy the other condo. And yet when a stock drops on the market, instead of thinking of buying more, most people automatically become fearful and think they should sell.”
Going back to the benefit of leverage Mr. Coleman adds: “banks love to lend against it (real estate). Over time, this lets you own a property with a much smaller investment than if you had to buy all of it at once.” Again, as an investment professional who sees many types of investments, Mr. Coleman believes buying real estate with a 5 to 1 leverage based on 20% down is a much safer investment than buying stocks on margin with 20% down. Any drop in the market gets a margin call and has wiped out many an investor. The ups and downs of real estate are much more gentle and high net worth people like that gentle ride.
On the downside, real estate is not particularly liquid. Real estate can be sensitive to interest rates and if you are in the development end of the game, timing can be critical. New projects coming on in Calgary are not looking good.
And, lastly, these are words that every investor should heed. Says Mr. Jochlin:
“Timing is key. You do not want to chase the performance of a hot real estate market. Buying at highs will significantly reduce your overall return on investment. You want to buy in very depressed markets at a discount. In other words, look toward relative multiples, as you would an equity.”
So, there you are folks. In these tough economic times, think about those really rich people who know real estate is a great investment, and heed the advice of the people that make a good living advising ultra-rich people how to invest.
- Ultra-rich people love real estate
- Real estate is an inflation hedge through yield, leverage, capital gains.
- Real estate is great in up-markets; it pays you to wait in flat or down markets. Not as volatile as stocks.
- Don’t chase ‘hot.’ Buy when markets are depressed.
[i] All quotes in this Tale are taken from the following Globe and Mail article:
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