Most of us were taught at an early age that the best way to invest and grow one’s wealth was to invest in the stock market. Other forms of investment commonly available to people, such as bonds, money market funds, and CD’s were lower risk, but had lower returns.
As I write this in mid-December 2018, I note that the stock market is down for the year, with the market having given up all of its gains for the year in less than the last 60 days. Looking back since the beginning of 2000, almost 19 years ago, the compound annual growth rate of the S&P 500 has only been 3.2% per year, with steep highs and lows along the way. As I read the current economic forecast, I observe most economists saying that we are at the top of a business cycle and that we are heading into a turbulent period for investing in the stock market, signaling the end of a 9-year bull run. So as an investor evaluating how to invest, the data shows less-than-stellar historical stock market performance over the long term with a lot of uncertainly ahead, at least in the near term. It is an uncomfortable investing environment for stocks.
That’s not to say that one cannot make money in the stock market; indeed, those who timed their buying and selling decisions well and picked the right stocks did great. But like most Americans, I’ve never figured out how to time the market that well or picked the right stocks. I have some big winners, but equally I made many mistakes in my timing. That is why I’ve always included investment real estate as part of my personal portfolio since I began investing over 30 years ago. My real estate investments have consistently showed significantly higher compound annual returns and greater stability than stocks. Importantly, real estate has never required me to precisely time the market. I mainly chose my investing locations wisely and made sure I had competent property management, which has been the main focus of my company, Meridian Pacific Properties.
I get asked a lot about the outlook for investment real estate, and I think that even now it is one of the best places to invest; I along with many of Meridian’s investors am continuing to do so. Real estate has enjoyed stellar appreciation since 2011, and while I see a slowdown in appreciation rates, I still see healthy appreciation ahead, at least in the submarkets in which we are presently active in in Memphis. When homes appreciate, the rents generally track upward with the home values, which bodes well for increasing cash flow over time.
I especially like our new construction available in the Davall Hills subdivision in Olive Branch, MS, an upscale suburb of Memphis, TN. This subdivision is located where the composite GreatSchools.org ranking is 9.67 out of 10.0, which has made it very desirable for both homeowners and tenants. Properties in good school districts retain high demand in virtually all phases of the business cycle, which suggests there will be low vacancy over the long term. The rents are high enough to attract tenants with above-average income and credit. And since the construction is new, the structural maintenance expenses are expected be very low, certainly for the next 10 years or so. Plus, the homes, are beautiful; take a look here: Davall Hills Subdivision.
We expect the average cash-on-cash return to be approximately 6% for cash buyers and total internal rates of return of between 11% and 12% per year over the next 10 years for our leveraged buyers, not including the extraordinary tax benefits. So as you do your investment and tax planning going into 2019, now would be an excellent time to take some of the stock market gains off the table and/or sell underperforming investment real estate (such as in CA) and re-invest in high quality, stable Class-A real estate. Interest rates have taken a momentary dip but are expected to continue to rise, so for those considering using debt for their investment, it would be advisable to act soon.
To learn more, please contact Brian Conlon at (805) 276-8654, firstname.lastname@example.org.
Kevin Conlon is Principal and Co-Founder of Meridian Pacific Properties, founded in 2006. He has been a real estate investor continuously for over 30 years. He is a regular featured speaker at investment real estate industry conferences.