Judging by the volume of commentary from a parade of pundits on every major financial news outlet …
.. you’d think stocks are the undisputed champ for wealth building.
Meanwhile, real assets … things like real estate and gold … are largely ignored as boring relics for the unsophisticated and fearful.
Then a pesky thing called data shows up and breaks the paradigm …
Of course, The Real Estate Guys™ have been broadcasting for the last 20 years … talking up real assets like real estate and precious metals.
Coincidence? Could The Real Estate Guys™ be the driving force behind the outperformance of gold and real estate?
But it’s sure fun to see data from a credible source back up our core investing theses …
… real and essential assets are the most resilient place to grow and store wealth in the face of worldwide currency dilution.
It’s true (according to this chart) that gold is tied with emerging market IOUs (bonds). But really … which would YOU rather have?
Gold has no counter-party risk.
And if you REALLY want yield (interest) … aren’t rents or mortgage payments a MUCH better source of income than bonds?
Yes. Yes, they are. Bond yields are miniscule … and that’s being kind.
But worse, if a bond issuer fails, you get a big haircut … or nothing at all. It’s up to the bankruptcy courts. There’s no Plan B.
Real estate rents and mortgage payments are arguably MUCH better options for income than bonds.
Rents and mortgage payments provide asset-backed higher yields … and options when things go wrong.
If a tenant fails to pay rent, you can evict the non-payer and put in someone else.
Of course, if the current eviction moratoriums get out of control, your risk increases. Policies matter, so pay attention and take appropriate precautions.
Meanwhile, if you invest in mortgages and a borrower fails to pay, you have options.
First, you can forbear, modify, or otherwise work it out with the borrower. There are many good reasons to try this first.
Of course, we’re guessing because politicians tend to protect their banking pals, lenders might have it easier than landlords.
So far it seems most foreclosure moratoriums target government backed loans. Of course, this could change and private mortgage holders could get hit.
Did we mention that policies matter, so it’s smart to pay attention?
So if you can’t or don’t want to negotiate a workout, your next option is to foreclose. Depending on the loan-to-value, you might end up owning at a great price.
Once you own the property, you can rent it out.
Yes, you’re a landlord with all the inherent risks and responsibilities, but your income and total return might go up!
We’re pretty sure bad bonds don’t work that way.
Of course, if landlording’s not your thing, you can sell the property to recoup some or all of your capital. You might even fix it up and make a profit.
Again, not a horrible outcome compared to what happens when other forms of debt go bad.
You might also choose to sell the property to another buyer and carryback a new mortgage.
You’d likely get a down payment based on the value of the property, not your cost basis (the principal of the loan that went bad).
When you add up the down payment and the yield on the new debt, your total return can be very nice.
So lots of options … and all much better than getting a bankruptcy notice from a bond issuer.
But if you insist on having some bonds in your portfolio for “safety,” it’s probably a good idea to get them from a currency issuer in a currency you’d like to have.
For most people, this means U.S. Treasuries … currently at sub-miniscule yields.
Of course, Treasuries have virtually no counter-party risk … BUT make sure you understand what happens to the principal value of your bonds if rates rise.
Hint: It’s not good.
Then consider U.S. bonds mid-pack ranking on the aforementioned 20-year chart … and this while rates were FALLING.
How much lower can they go from here? Seems like there’s a lot of principal risk in Treasuries right now. But that’s just us … and we’re not experts.
Meanwhile, real estate sits at the TOP of the 20-year chart …
… and right in the middle of this period was the worst real estate crash in modern history. This certainly bolsters the case for real estate’s resilience.
Now we’re not privy to the research and date underneath the chart. We’re taking it at face value because it’s from a credible source.
But we’re guessing the calculation for real estate is based on price only … i.e., appreciation. Experienced real estate investors know appreciation is only one of FOUR contributors to after-tax return.
When you put in leverage (a mortgage) and rental income …
… and then factor in amortization (paying down the loan with rental income) plus tax breaks (huge right now) …
… the long term after-tax returns for rental real estate can EASILY be over 20% annualized over a long period of time.
We bet if all of four profit centers were factored in, real estate would have been off the chart better than everything else.
Of course, when you know how to optimize your equity over 20 years, you can do even BETTER.
Of course, this doesn’t mean all real estate is a smart investment all the time.
In fact, an argument could be made today that MANY markets and niches are pricey and prone to slower growth or price declines in the near future.
After all, many forms of real estate rely on people having jobs and incomes to pay rents and mortgages.
Right now, jobs are a little sketchy in many areas.
So as much as we LOVE equity … we know equity is fickle and only exists on paper. If the air comes out of the market, equity can fade away fast.
Because of this … with prices so high and interest rates so low right now, we think it’s a good idea to consider strategies to reposition or recharacterize equity … while you have it.
It’s more than we can get into here, so we’re creating strategy trainings to share some of our “what we wish we knew in 2006” ideas.
We’re not saying 2021 will be Great Financial Crisis 2.0 … but we certainly wouldn’t be surprised. Many of our big-brained friends are concerned.
Meanwhile, we can’t think of any good reason not to prepare … and many millions of reasons why it’s probably a good idea.
But this isn’t doom and gloom. FAR from it. In fact, we’re pretty excited.
As long as we have private property rights and the freedom to do business, we’re sure we’ll find opportunities in the marketplace … no matter how chaotic it gets.
Of course, how it turns out for any given investor depends on their individual education and effective action.
Think and do is better than wait and see.
Meanwhile, this chart highlights that when you’re playing a long game and stick to assets that are real, essential, and benefit from nearly certain and irreversible trends (like a falling dollar) … your odds of relative long-term success increase.
Lastly, consider this …
Real estate and gold have something in common many investors don’t always grasp … the key to growing wealth with each is debt.
Without debt, both real estate and gold preserve wealth. With debt, they GROW it. That is, they FAR outpace inflation and allow you to accumulate real wealth.
Last clue: wealth isn’t dollars … and it isn’t equity. It’s this distinction we missed in 2008 but are much more clear on today.
So while it’s exciting to see that over the last 20 years, both gold and real estate did very well compared to most other major options.
And we know when we add debt to either, but especially real estate, they do even better.
But when you put them together with debt, they can absolutely AMAZING … especially in a world where currency and debt creation are exploding.
It’s a hard concept to get your mind around, but once you do … you’ll find it’s not only easy to see … it’s easy to do. Stay tuned for more info coming soon.
Until next time … good investing!