Warren Buffett quips that his favorite holding period is “forever.” That’s fine for him and, like most of his sentiments, sage advice. But for most investors, it’s merely aspirational.
Whereas Buffett can wait for the cows to come home for healthy returns, retail investors have shorter horizons and tighter constraints at play.
Floating an investment over what sometimes seems to be an endless, choppy ocean of risk and volatility might scream potential upside in the long term, but that isn’t a luxury everyone has.
For investors still on the royal road to wealth, time is neither a limitless abundance, nor is money an endless backstop.
Many investors – retirees, for instance – are dependent on their investments for regular income. Day-to-day finances remain ever present concerns. Accounts need to be squared, retirees need an income stream, etc., etc.
In short, common investors can’t simply defer returns indefinitely. Returns actually need to happen. And, until there’s cash in your pocket, it’s not a return. Yield matters. It’s as simple as that.
Laying out the Options
The common investment vehicles that investors utilize can be effectively broken down and simplified into just a small handful: Savings, bonds, stocks and real estate.
It should come as no surprise that they aren’t all created equally.
Let’s take a whistle stop tour of the pros and cons of each. At the end, you’ll see why commercial real estate holds stark advantages and trumps the alternatives.
When safety, passivity, fear and lack of investment knowledge hold the reins, cash ends up idling its time away in savings and money market accounts.
The advantage here is that there’s nothing more liquid than cash itself. With money in the bank, I can access it at will.
But with annual interest in the sub-1% range – and usually closer to half that – only those who take risk aversion to irrational extremes would ever consider this a legitimate investment vehicle.
For the rest of us, there are bigger (read: actual) fish to fry.
Those looking for risk-free but (nominally) substantial returns usually turn to bonds. And although the yields are better here than in a savings or money market account, they’re still abysmal.
And worse, because of the Federal Reserve endlessly mucking about with monetary policy, bond yields spent the better part of the last decade hammered down almost completely.
True, the yield on the 10-Year Treasury has hovered between 2.5% and 3% since June. That’s a substantial improvement over yields eve a year ago, when it seemed like they’d never see the better side of 2% again.
Even so, settling for a 2% to 3% yield on a 10-year treasury might be safe, but that kind of return is hardly substantial in a near- to mid-term.
While bonds have their place in every portfolio, because they are easily outmatched by the returns other forms of investment offer, their use is limited.
Now we’re getting somewhere.
The increased risk of stocks comes, of course, with much higher potential returns. Further, the glut of dividend-paying stocks means annual income, to boot.
On the other hand, the heavy run up in stock prices over the last year means that the average S&P 500 yield as of today stands just a hair over 1.9%. (That’s worse than bonds. Yikes.)
In short, so much for cash in your pocket…
Granted, investors are free to seek out higher-yielding stocks. However, buyer beware, because high-end yields are often used to distract investors from an equity’s fundamental problems.
Now, Real Estate Investment Trusts (REITs) are a popular way to achieve higher than average yields.
By law, REITs are required to distribute 90% of their earnings back to shareholders. This results in marginally higher annual yields – 4.2% on average, as of October – without the problems so many high-yielding stocks display.
Although an investment in a REIT is moving in the right direction – i.e., towards direct investment in real estate itself – there’s one glaring downside: fees.
Between you and the property there are string of actors that result in massive fees, sometimes up to 17%, eating up your investment capital before it ever starts working for you. That’s a huge price to pay for only somewhat higher annual yields.
Direct Real Estate Ownership~
Indeed, bypassing REITs entirely and opting for a form of more direct real estate ownership not only results in far lower fees, it means much higher returns.
Case in point: Commercial properties often distribute cash in the range of 6% to 12% annually. That’s far above the fold compared to bonds and stocks.
Further, real estate investment ditches the problems of stock volatility. In a stable property, income is generated by tenants. Tenants with good credit standing and stable history of payment translates, on the whole, to a stable and predictable investment.
And that means a stable, predictably high rates of return, and a dependable stream of cash into your pocket.