Real Estate as a Store of Value

Recent volatility in the stock and bond markets has people turning to gold as a “store-of-value.”   That makes sense.  Historically, gold maintains a value, is a hedge against inflation, and is transferable (weight aside).  When markets get rocky, people seek to invest in hard assets like gold and real estate.  Both represent limited supply, locally and worldwide.  And both investments have a thousand-year history of “being there” on the other side of bad things happening in the world.

What Is a Store Of Value?

A store of value is an asset that maintains its value without depreciating. Gold and other metals are good stores of value as their shelf lives are essentially perpetual, whereas a perishable item (milk, for example) is a poor store of value because of its propensity to decay. Interest-bearing assets, such as U.S. Treasury bonds (T-bonds), are very good stores of value because they generate interest income and their principal balances are backed by legal contracts. Investopedia – What is a Store of Value

But what moves value?  That also hasn’t changed in hundreds of years; it’s investor sentiment. What has changed is the reaction time of investors to news of the day. I am fond of saying we live in a 24-second news cycle now.  Instantaneous decisions are imperative at times, but not when making a long-term investment decision.  More than 24-seconds is required to decide on an investment when you have to live with the results for an extended period.  Don’t believe me?  Try selling a piece of real estate when you have to versus when you want to and see the offers dry up, drop to the floor or point-blank become insulting.

Is Multifamily a Gold Alternative?

The short answer is no.  Of the various asset types within real estate, multifamily remains a favored investment because there is a larger investor base than for other assets within real estate. There are simply more investors interested in multifamily versus office, retail, or industrial.

Is multifamily investment property a “store of value”?  Yes. Real estate, in terms of investment allocation theory, is not a replacement for gold but it generates certain benefits, namely income.  In multifamily revenue can and does waiver at times, but it seldom drops to zero.  Thus, for an investor using limited debt, there is revenue for the payment of operating expenses including taxes and insurance.  Do you want to know which real estate investors will best survive COVID-19?  Look at those with high debt service coverage ratios: 1.25 and higher.  These will be the survivors.

Gold is a defensive investment.  Multifamily can be an offensive and defensive investment; defensive against inflationary occurrences and offensive as a current income generator.

As financial markets have increased in sophistication (with the use of margin accounts, derivatives, spiders, etc.),  gold is in many instances, just one more piece of paper in an investment portfolio.  The vast majority of individuals that own gold have never held a single ounce in their hands.

Direct real estate ownership is different from gold ownership.  Owning un-leveraged income-producing property can provide a stable source of current income. Presuming the asset is in a quality market, and insurance is maintained, short of a catastr0phic event, you own it forever (forever in this instance being multi-generational).

Multifamily real estate is not a replacement for gold as a store of value.  As an investment vehicle, multifamily does, however, offer some of the same positives investment-grade aspects as gold:

  • Real Estate is a hedge against inflation
  • Real estate, as a store of value, is a hard asset.
  • Real estate remains in high demand (there are thousands of passive multifamily real estate investors that will attest to this).

Thus, while multifamily is not a replacement for gold, it is an alternative investment with some similarities to gold when purchased without debt.

 

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