TINA versus TAGA
Recent gyrations in the stock market have many investors wondering about what to do in 2020. Since the stock market bottomed out in early 2009, the Federal Reserve has kept interest rates artificially low. Even with unemployment at historical lows in 2019 and the economy appearing to be fairly strong, the Fed decided to cut interest rates. This was a perplexing decision because generally when you have a strong economy and low unemployment the Fed would be raising interest rates back to normal levels.
With interest rates ridiculously low for the past 10 years, many investors moved vast amounts of money into equities and bought into the philosophy known as TINA (There Is No Alternative). Money market accounts, CDs, bonds and other fixed income instruments were providing paltry returns, sometimes below the rate of inflation. As equities continued to rise, TINA became a self-fulfilling prophecy. More and more people over-weighted equities in their investment portfolios and enjoyed the ride until the Coronavirus situation became the catalyst for the recent stock market crash.
However, sophisticated investors know that a diversified portfolio is the key to long-term financial security and wealth building. TAGA means “there are good alternatives” to equities and one of the best is income producing real estate. Investors can choose from single-family homes, condos, multifamily properties, apartment buildings, commercial, industrial, land leases and other types of real estate investments. In addition, you can invest in first or second mortgages, shared appreciation mortgages, bridge loans and hard money loans. Often overlooked are investments in franchises and other business opportunities that provide positive cash flow year after year.
During the past four years it has become increasingly more difficult to find good real estate investments as prices have risen significantly in most markets around the country. However, there are always opportunities if you are willing to beat the bushes and do the research necessary to find a suitable property. A general rule of thumb for residential properties is that you would like the monthly rent to equal or exceed 1% of the purchase price. While this is pretty much impossible at Lake Tahoe, there are opportunities in other areas where property prices are not so steep. You can also sacrifice some cash flow in markets where there are solid rates of appreciation historically. But whether your priority is maximizing cash flow or appreciation is a decision each investor makes on based on their own needs and risk tolerance.
One thing to remember when investing in real estate is that it does not have the liquidity of stocks, bonds, mutual funds, money market accounts or CDs. But it can also provide substantial tax benefits including the ability to deduct mortgage interest, direct expenses such as insurance and repairs, plus the benefits of depreciation.
If you hold properties inside of a qualified retirement plan the deductions don’t really help out very much, but you’re also not paying any taxes on the annual income. So, properties held inside a retirement plan can generate substantial amounts of positive cash flow that can be reinvested into equities, real estate or other types of investments. Being able to compound your returns on a tax-free basis especially over a long period of time is extremely beneficial to your wealth accumulation plan. Since real estate is our business, we prefer to over-weight in income producing real estate and under-weight in equities. While we give up some potential equities gains during bull markets, we sleep a lot better at night owning cash cows in good locations.
Weekly Real Estate Update
Statistics gathered from the Incline Village MLS on 3/29/2020
Houses Condos PUDs
For Sale 67 51 11
Under $1 million 8 35 6
Median Price For Sale $2,425,000 $689,000 $1,146,200
YTD Sales 2020 27 37 9
YTD Sales 2019 24 35 12
New Listings 4
In Escrow 1
Closed Escrow 4
Range in Escrow $343,000 - $343,000
These statistics are based on information from the Incline Village Board of REALTORS® or its Multiple Listing Service as of March 29, 2020