What Most Investors Miss

Should this Overlooked Asset Be a Core Part of Your Portfolio?

Diversify. Diversify. Diversify. We’ve all heard this many times. Yet most investors hold typically just two asset classes in their portfolios: Stocks and Bonds. The biggest opportunity I see most investors miss is real estate. Adding this third asset class would not only provide investors greater diversification — but could also improve overall returns. Here’s a quick look at why and how.

“It’s amazing how many people tend to overlook the investment potential of this asset.” — Investopedia

How Far Can Stocks Go?

At the start of the year a Goldman Sachs outlook report noted that the median stock trades at the 98th percentile of historical valuations. Since then the DJIA has risen over 7% pushing the median well into the ~100th percentile of historical valuations. Just think about that. I own a lot of equities, so I certainly hope the market goes up in the short-term and that any new legislation fuels further increases well into the future. That said, given these lofty valuations combined with the uncertainties playing out in Washington, I believe there is much more room on the downside than on the upside for stocks. I’m not putting any new money into the stock market anytime in the foreseeable future. In fact, I’m looking to take some profits.

How about bonds?

So where should investors put new money or gains? Are bonds the answer? In the weeks following the election the 10-year treasury jumped to a 16-month high 2.4%. GS predicts the fed will increase rates 3x next year and push the 10-year treasury to 2.75%. That’s it. After taxes net gains on treasuries will be less than the expected 2% rate of inflation. You will effectively lose money with US Treasuries. There’s got to be a better option for fixed return.

Where is the best place to invest in 2017?

From my perspective the answer is clear: real estate. Specifically, I like the multi-family real estate investment model and track record of OpenPath Investments. Full disclosure: I have been an investor with OpenPath since leaving Google in 2007 and then later became an active partner with the firm helping new investors learn about real estate. OpenPath Investments is a social impact real estate company. We acquire workforce housing (i.e. large apartment complexes) in stable, growing, inventory constrained markets (not SF, LA or NY) and then add value to the properties — with an eye on the environment — while building community for the residents. This short video shows how it works.

10 years of Market-beating results.

At OpenPath Investments our approach to social impact investing has delivered positive outcomes for people (working-class families) and the planet while delivering market-beating results and profits for our investors.

Let’s compare OpenPath to afore-mentioned stock market. Again, GS’s prediction is for a 5% gain in stocks in 2017. Looking back, the S&P 500 has a 10-year annualized return of 7.20%. Over that same 10-year period, OpenPath has averaged a 33% IRR (internal rate of return). This pertains to the 8 properties we acquired and sold over this period. The average hold for these properties was 2.7 years and the average multiple on equity was 2.0X. More details on our approach to real estate and our financial performance is in our corporate overview. It should also be noted that real estate offers tax advantages that can enable you to defer taxes on your gains, which makes these numbers even more compelling compared to stocks and bonds.

What’s Next?

Does OpenPath expect to see these kind of results going forward? To be sure, the last 10-years have been good for real estate in general. At OpenPath our model has taken advantage of this broad opportunity. Over the next 10 years, we’d be thrilled to match our returns from the last 10 — but we don’t plan for that. Instead we urge investors to set more conservative expectations. Going forward, we expect that new OpenPath opportunities in 2017 will deliver a preferred annual return in the ~6–8% range and total IRR of ~14–15% . These kind of returns still far exceed the recent returns from the Dow and S&P as well as even the most optimistic forward projections for these stock indexes. The above OpenPath projections are general targets and subject to change based on the information we have at the time of any specific investment. As always, we will provide more details and pro forma projections for specific opportunities/properties as these come available.

The Net-Net, when I look at the risk/reward for stocks and bonds in 2017, I don’t like what I see. For me OpenPath’s multi-family real estate and social impact model offer a much more interesting opportunity for strong returns.

If you’d like to learn more, I invite you to visit our site or send me a note at david at openpathinvestments dot com.

A couple other posts that I think you will like:

“My Next Google: A perspective from employee 75

“Real Estate’s Long Boom: Experts See Decades of Opportunity

Note: OpenPath investment opportunities are for accredited investors. I am not a CPA or professional financial advisor. All opinions are my own. I encourage you to consult your accountant to fully understand your individual tax situation.

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