After listening to financial media today and talking with more commercial lenders, I am starting to notice a trend of being more conservative and hearing the word capital preservation. It is not surprise that some would be considering capital preservation after the wild run ups that we have had following the downturn in March of 2020.
Capital Preservation
Wells Fargo estimates $2.4 trillion in excess savings has been accumulated by consumers since the start of the pandemic based off data from www.bea.gov. This is a combination of stimulus, unemployment, and not going out often. It could start to dwindle as things get taken away like extended unemployment, stimulus checks, and eviction moratoriums.
Capital preservation is not speculative, it is meant to maintain what levels of wealth you have accumulated. Traditionally, gold is a preservation of capital. In the medieval times 1 ounce of gold could buy a suit of armor and now it can buy a nice suit. It is a store of value or preserved. If the price of gold goes up the value is always about the same in terms of what 1 ounce will buy. It is the fiat currency that gets devalued. We are seeing this happen in real time as prices go up.
Why Multifamily
Real estate is a hard asset that is a hedge against inflation. If you carry low-interest debt on a property, then the debt burden gets inflated away. My favorite example to use is imagine inflation got horrific and the price of bread is $100,000. That means the price of your real estate would be significantly higher and the debt would be insignificant. If I have $1 million in real estate debt, then I pay off the properties with 10 loaves of bread. Of course, that is an extreme and highly unlikely example, but I think it serves well to illustrate the point.
Single family assets can serve this inflation hedge well but are not as advantageous in preserving wealth in my opinion. Single family real estate is evaluated on comparable sales. If there are foreclosures and more houses listed for sale it could affect the price negatively. If you do research on the real estate crash of 2008 you will find that multifamily did ok during that time because it is based off income streams not comparable sales. I think that is why multifamily is a great preservation of capital and a great hedge against inflation. Smart money managers are also aware of just how well multifamily does in economic turmoil. Look at what happened to office and hotels since the start of the pandemic. They have been on shaky footing while multifamily has continued to go up. More money is flowing into the space because people realize that you can’t really disrupt the space—people need a place to live.
Conclusion
Protect the downside and profit from the upside. Learning about multifamily investing is one of the best ways to preserve your capital and grow your net worth.
