Buy Treasuries or Real Estate?

[Arn Cenedella]

While the 5% “risk free” Tbills looks attractive………….

It also at least partially assumes an investor can time the bottom of the real estate market.

Perhaps one CAN time the market……….

I went to Colgate University for undergrad and then University of Michigan for grad school and ended with a MS in Physical Chemistry. So I have at least a solid level of education and intelligence.

My entire adult career has been spent in the real estate industry starting in 1978…..and have been investing since 1980…….

And I don’t try to time the market………

In my experience:

1. The bottom of the market isn’t known for 6 to 12 months after the fact.

2. When the market turns up, it does so quickly and so the window of opportunity is short.

3. When the market turns up, prices also go up quickly.

We all read stories about immense amounts of capital - dry powder - poised to jump back into the market…….

Assuming there are deals to be had…….I submit for consideration, the retail investor isn’t going to get them……it’s the groups with Millions and even Billions in the bank that will get them……

While returns on multifamily have decreased - at the present time, solid deals run by experienced operators might yield 13% 14% IRRs……….and 16% or 17% annual rates of returns…..

On a 5 to 10 year horizon, I believe investors will be better off continuing to invest in real estate than Treasuries……..

So while parking the money in Treasuries may feel safe - deciding when and where to re-enter the market is a difficult decision.

I believe retail investors will do better investing with a long term horizon - less focus on timing the market or getting a deal - time in the market v timing the market.

Thoughts?

[Nathan Whitson]

Good insights from all three posts. Things I agree with:

-Real Estate Investing can typically get you a >10% IRR; appreciation, cash flow, amortization pay down, and depreciation.

-The common person isn’t very successful in timing the equities market, or many markets for that matter.

However, the short term market is shaping up to be very different than anything we've experienced in the last 20 years. Some metrics and predictions are trending toward a 30 year historical since we've seen some of this. While not impossible, it's hard to find deals right now. Appreciation is stuck between 5% and -5% in most markets. If you do find a deal based on price, your margins are squeezed because of cost of capital. With interest rates +8%, most deals aren't seeing a positive cash flow. In most cases you are not gettin a >10% IRR out the gate on new investments right now.

When securities are at 5%, you should expect a larger delta in IRR for the extra risk and work/time into other investments. Which is hard to come by right now, as explained above.

I’m not an investment advisor, so I’ll tell you what I’m doing. Since I already have great exposure to the real estate market, I am fine diversifying into the more passive securities while the market normalizes, or at least tries too. The delta needed for the added risk/exposure just isn’t there today. If I was just starting out and in growth mode then I might entertain more of the real estate market right now, having a more long term outlook, but I’m not. If I have enough for cash offers, I will move on those because I think there is some value add there for cash buyers in this short term market.

As of 10/28/23 the bond market is predicting rates +4.5% for the next 30 years, which normally equates to primary mortgage rates close to the 6%. Investment loans likely +7%. If this market is close to being correct then then the delta may not be there in the long term either. Expecting long term IRR of >10% could be detrimental, if this holds. In this scenario for the delta to become more intriguing, the prices of real estate would have to come down more than 10% or so. Likewise, this is one major metric I'm watching right now.