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Chris Finlay, Chairman/CEO Lloyd Jones Capital, LLC
info@lloydjonescapital.com

Is It Time To Keep Your Money Under The Mattress?

June 24, 2016

Wait…There’s a better solution.

Interest rates are plunging around the world; some are even closing below zero. And with negative and minimal inflation, the real interest rates are also pushing 0%.

A June 9th Financial Times article on negative rates stated “Lenders in Europe and Japan are rebelling against their central banks’ negative interest rate policies with one big German group going so far as to weigh storing excess deposits in vaults.” And some fund managers are telling clients to keep their cash “under the mattress”! Wow!

It’s understandable when you see real interest rates. A recent Wall Street Journal article included an interesting chart of selected government bond yields. To calculate a real interest rate, economists subtract inflation from the nominal yield – thus the economic struggle between yields and inflation. And on June 10th, the 10-year US Treasury yield fell to its lowest close in 3 years. (At this writing, after Brexit, the 10-year Treasury has fallen below 1.50%.)

lloyd jones capital interest rates chart

No wonder some banks are considering storing money in vaults! Now, compare those returns to direct multifamily investment. With a conservative 60% leverage, a good multifamily real estate investment can earn 8% returns with minimal downside risk. Plus, real estate is a strong hedge against interest rate changes and inflation.

Wise investors are beginning to recognize the value of multifamily real estate investment. In light of this (sometimes negative) interest-rate scenario, it’s time to assign a portion of your investment portfolio to solid multifamily real estate in high growth markets with, of course, conservative leverage.

Look at the Harvard University endowment. Its fiscal 2015 real estate portfolio was its highest returning asset class, at 19.4%. And Yale’s legendary endowment fund, which has consistently outperformed its counterparts, attributes its success to its alternative assets.

Duplicating Harvard’s results going forward is unlikely. But multifamily assets can produce easily an 8% yield and a conservative 16% IRR over the next seven-to ten-year period. And, with depreciation, they will provide a significant tax advantage for the individual investor.

Granted, these investments are not available on your Bloomberg terminal, unless you want to invest in REITS, which are like stock. Even REITS can produce 4% returns and offer liquidity, but the after-tax returns will be substantially less than a good multifamily direct investment. An experienced real estate investment specialist will guide you through the investment process. Be sure that firm has a strong operations arm. Operations is the key to property performance.

So what is the proper allocation? In my opinion, you need 20% in direct, multifamily real estate investment. (Harvard’s real estate commitment for 2016 is between 10% and 17%. Yale University allocated 17.6 percent to real estate in 2014.) After that, I’d suggest 40% stocks; 30% bonds; 10% alternatives.

In all my years (35 in this business) I have never seen such a disparity between yield on the 10-year Treasury and a quality multifamily asset. You’ll notice that I stress “multifamily.” I would be extremely cautious about retail and office investment. But nothing makes more sense than direct multifamily investment. The demographic demand is unprecedented. And everybody needs a place to live.

 

Christopher Finlay is Chairman/CEO of Lloyd Jones Capital, a private-equity real-estate firm that specializes in the multifamily sector. With 35 years of experience in the real estate industry, the firm acquires, manages and improves multifamily real estate on behalf of its institutional partners, private investors and its own principals. Headquartered in Miami, the firm has operations throughout Texas, Florida and the Southeast. For more information visit: lloydjonescapital.com.