What may look ‘Safe’ may actually Lose you Money

Investing in Real Estate versus Investing in “Safer Assets” 

“Why would you want to invest in real estate yielding 5-8% if you could buy treasuries yielding 5-6%?”   

Besides, a real estate deal has risks, whereas US Treasuries seem to be a sure bet (unless the government goes into default.)

These days, investors are being a little more cautious. With real estate deals these days projecting lower cash on cash returns than a couple of years ago, and concerns over a recession, it seems natural to want to park one’s money into an asset that is considered a safe and sure bet with a similar yield, rather than something that seems risky in this environment.

But that is only part of the story.

When you roll over short term treasuries and purchase new ones, the interest rate could be lower, therefore short-term treasuries are not a long-term solution. 

Long-dated treasuries (such as the TLT ETF) have lost 50% of their value since three years ago. Why? Because as interest rates go up, values of the bonds go down. The value of your bond yielding 5% is less because one can get another one with a higher yield. So whatever you may have earned in cashflow you have more than lost in the value of the principal. 

Buying or investing in quality real estate (or other inflation-protected assets) to hold long-term is not an outrageous thing to do, even if it only yields 5% today. 

Real estate is inflation-protected. Long bonds get wrecked in inflationary environments.

As inflation progresses, revenues (i.e.:  rents) can increase, and underlying value of the property increases over the long term. Thus, a well chosen property yielding 5% today may really increase its yield tomorrow, in addition to appreciating over the long term. Over the life of the investment, cash flow and appreciation may give you an average annual return of 10-20% (or more), versus a treasury bill that pays 5% annually but may lose its value or stay flat over time if interest rates continue to go up. 

It is totally reasonable to collect T-bill coupons and wait to deploy your capital for when opportunities arise. But it is not reasonable to indefinitely sit on the sidelines in cash or ‘safe’ assets, dismissing good opportunities along the way or thinking that you can time the market.  

Sitting on the sidelines solely in treasuries for too long is not an effective wealth-building or even wealth-preserving strategy.

If you want to talk about how you can build and preserve wealth and generate passive income like the ultra-rich, set up a time to talk with me