With interest rates holding steady (so far) and US Treasury yields hovering in the 4-5% range, many investors are weighing the pros and cons of staying in bonds versus seeking opportunities in real estate. While Treasuries are often viewed as "risk-free" investments, certain real estate deals in today’s market offer a compelling alternative—especially when purchased at a deep discount.
Take, for example, a 1,000+ unit apartment complex in a suburb near Michigan. This property is being acquired at $79K per unit, a sharp contrast to comparable apartments in the area selling for ~$140K per unit. We are planning to hold it for 5 years and bought a rate cap to cover the entire hold period. For investors looking to maximize returns while managing risk, here’s why this type of deal stands out compared to Treasuries.
Treasuries: Safety with Limited Upside
Treasuries are an attractive option for those seeking safety, especially short-term bonds with maturities of one year or less. These offer a predictable return in the 4.25% range right now with minimal interest rate risk. However, longer-term bonds (1-5+ years) are subject to interest rate volatility:
- If rates rise, bond values drop, potentially leading to negative net returns.
- If rates fall, bonds appreciate, but gains are capped by their fixed coupon rates.
While Treasuries provide stability, they offer limited upside and carry hidden risks for medium- to long-term maturities.
Why Real Estate Is a Stronger Option in Today’s Market
Multifamily real estate, particularly value-add properties, presents an asymmetric risk-reward profile that Treasuries simply cannot match. Here's why:
- Deep Discount Buying Opportunities
After a period of aggressive rate hikes, many real estate assets are trading 20-30% below peak prices seen in 2021-2022. Properties like the Michigan complex offer a unique entry point, combining cash flow and significant upside potential. - Immediate Cash Flow
This particular property is projected to deliver 6% annual cash flow from day one, already exceeding the yield of Treasuries. - Value-Add Renovations
- The property includes hundreds of units that can be upgraded to Class A finishes, justifying rent increases. Planned energy-efficient HVAC installations will replace outdated ceramic heaters, reducing tenant utility costs, lowering insurance premiums, and qualifying for utility reimbursement programs—a win-win for tenants and investors alike.
- Inflation Hedge
Real estate is historically a strong hedge against inflation. As inflation drives rent growth, properties in stable markets like the Midwest can continue to deliver returns even in higher-rate environments.
Market Conditions Favor Real Estate Recovery
The commercial real estate (CRE) market has faced significant challenges in recent years, but signs point to a recovery:
- Bottom of the Market Cycle: CRE appears to have reached its low point in late 2024, with 2025 marking the start of a slow recovery phase.
- Limited New Supply: High interest rates have curtailed new construction, which should drive rent growth in the coming years.
- Policy Changes on the Horizon: There is growing discussion about potential policy shifts under the new administration, including a return of 100% bonus depreciation and lower interest rates. If enacted, these changes would bolster real estate valuations and enhance returns for investors.
How Real Estate Outperforms Under Different Scenarios
- If Interest Rates Rise (Higher Inflation):
- Treasuries: Medium- to long-term bonds lose value, potentially resulting in negative returns.
- Real Estate: Higher inflation leads to rent growth, boosting net operating income (NOI) and offsetting the impact of higher borrowing costs.
- If Interest Rates Fall (Cooling Economy):
- Treasuries: Bonds appreciate in value, improving returns.
- Real Estate: Lower rates drive cap rate compression, significantly increasing property valuations and returns for investors.
Conclusion: Asymmetric Risk-Reward in Real Estate
While Treasuries offer a safe haven, they also come with limited upside and potential interest rate risks for medium- to long-term maturities. In contrast, value-add multifamily properties like the Michigan apartment complex offer:
- Immediate cash flow exceeding bond yields.
- Significant upside potential through renovations and operational improvements.
- A position at the bottom of the market cycle, with strong tailwinds expected in the years ahead.
For investors willing to explore opportunities beyond fixed-income investments, the current CRE market offers a compelling case. With the potential for strong cash flow, appreciation, and inflation protection, real estate remains a powerful addition to any diversified portfolio.
What Do You Think?
Are you sticking with Treasuries, or does the deep value in today’s multifamily market make real estate the better option? Would you do a deal like this? Let’s discuss in the comments!
