The single best investment you can make for 2016

Advice I know you’ll be happy to hear

At the end of every year I like to do a deep dive into the performance of my portfolio and understand what’s working and what’s not. After doing this for several years, I started noticing a pattern. But before I get into the details, it might be helpful to share a little background about my investing.

In 2007 I had recently left Google after seven exciting years. At the time, my money was primarily invested in Google stock and lots of California tax-free municipal bonds. Later I would diversify by adding the S&P 500 and international equities to the mix.

That same year, a colleague from Google introduced me to OpenPath Investments, a social impact real estate company that focuses on delivering market-beating financial returns while at the same time “doing good for people and the planet”.

Initially I was hesitant about the OpenPath opportunity

After all, I didn’t know much about real estate — or impact investing. I was unfamiliar with the small firm. And quite frankly, the OpenPath’s targeted returns of 14–16% IRR looked almost too good to be true. What was I missing? But after careful consideration and a discussion with my financial advisor, I decided to make an investment in OpenPath’s next project.

Jumping forward to more recent years and the observations from my annual portfolio reviews. What I saw was that GOOG would have big swings up and down. The S&P was less volatile. Most years it did OK but when it did well, the S&P gains were usually offset by poor performance in the international markets. In other years, international markets would do well and the S&P would be off. Muni’s barely outperform putting money under my mattress. Lastly, every year the top performing investments in my portfolio were the OpenPath properties. I would get my 8% preferred return on principal — and then later, when a property sold, I also realized capital gains that brought my total returns to 18%+ IRR over the term of the investment. OpenPath was not only meeting my high expectations — it was exceeding them.

Every year I thought “I wish everything in my portfolio would perform like OpenPath”

So every year I invested in additional OpenPath properties. Every year I’ve seen the same strong results. Going forward, I am going to continue to invest in OpenPath properties. Why? Because when I look at my other investments, they really don’t stack up in almost every area that is important.

Here’s what I like about OpenPath — and I think you will too

1. Ten year track record delivering 18%+ IRR

Returns are the number one objective for most investors. 18%+ IRR — every year for 10 years is impressive and really hard to beat. Consider the average return for the S&P 500 over the last 10 years has been approximately 7.8% and that the return has exceed 15% in just two of the these years. In one year (2008) the S&P actually lost a whopping 38%. Even in just the last 5 years, which by almost all accounts have been quite strong, the S&P average return is 14%

2. OpenPath’s proven model for success means lower risk

Looking for market beating returns can often mean taking on a lot of risk. I used to do a lot of angel investing and luckily a couple of these actually paid off. But when I invest in an early stage start-up, painfully, I expect to lose the entire investment. With OpenPath it’s the exact opposite. I never expect to lose any principal, and in 5 years I expect to double my investment. As one former angel told me, “I don’t need to swing for grand slams anymore when I can get a double every time with OpenPath.”

3. Returns can be tax free and tax deferred

You really can’t look at returns without taking taxes into consideration. After all, it’s about what you keep. The top federal tax bracket on regular income is 39.6%. Even long-term gains are 20–25%. Then add on as much as another 13.3% for California state tax (or ~9% in NY). Taxes have a big impact on your returns. OpenPath pays investors an 8% preferred annual return. This is off-set by depreciation — so investors are essentially getting the 8% as tax-free income. Furthermore, capital gains on the property’s eventual sale can be deferred by rolling the proceeds from the sale into another property. OpenPath makes this easy for investors by identifying a “replacement” property and managing the reinvestment.

4. Social Impact: OpenPath helps people and planet

Obviously all investors will appreciate excellent returns, with lower risk and favorable tax treatments. Being able to make a social impact at the same time is truly special. OpenPath transforms our properties into thriving communities, which helps improve the lives of our working-class residents. Further, we implement serious eco-friendly initiatives at all our properties. This win-win-win is “triple bottomline” investing.

5. Real estate’s dependable return & income is a counterbalance to equity’s volatility & muni’s near-zero returns

Financial advisors almost universally stress the importance of diversification. For many investors, that typically means US & international equities (with a bias toward tech stocks) and a mix of bonds at the other end. Most investors I talk to haven’t done much with real estate — mostly because they haven’t been exposed to it or haven’t found access to the right opportunities. I’ve found that OpenPath real estate is not only an excellent diversification vehicle but more importantly, it’s consistently the top performing investment across my entire portfolio.

So, are there any areas where more conventional investments beat OpenPath? Perhaps there is one: liquidity. Investments in OpenPath are typically locked up for ~5 years — until the property is sold. So this is not a good fit for funds that you plan on accessing in the short-term. However in every other key aspect, I’ve found other investments just don’t stack up to OpenPath Investments.

Want to hear more? Please contact me at david@openpathinvestments.com. In the meantime, this short video is really helpful.

Also check out: My Next Google: A perspective from employee 75.

Note: OpenPath investment opportunities are for accredited investors. I am not a CPA. It is always a good idea to consult your accountant to fully understand your individual tax situation.