In the vast realm of passive investments, there are numerous options available to investors. From traditional Certificates of Deposit (CDs) to the newer realm of multifamily real estate investments, the choices can seem overwhelming. However, when evaluated under the right parameters, the right investment vehicle can emerge for those seeking stability, potential return, and even tangible assets. In this blog, we will delve into the advantages of passive multifamily investments when compared to CDs, Money Market accounts, and iBonds.
#1. Potential Returns
Multifamily Real Estate: Real estate, especially multifamily properties, has historically delivered consistent and often impressive returns. According to some studies, multifamily real estate has an average annual return between 6-12% after expenses, or higher. This not only factors in rental income but also appreciation in property value.
CDs: These are time deposits offered by banks with a fixed, generally low, interest rate. Currently, returns can range from 0.5% to 5.75% or slightly more, depending on the term and prevailing economic conditions.
Money Market Accounts: These are deposit accounts paying interest based on current interest rates in the money markets. Historically, they've had returns slightly higher than savings accounts but generally below most investment assets. While interest rates are currently high, these accounts can produce a nice return; however, as interest rates decrease, as is the mission of the Fed, so will the return of these accounts in time.
iBonds: These are U.S. government-issued bonds designed to protect against inflation. The return consists of a fixed rate plus inflation. While they offer the security of being backed by the government, their returns are generally modest.
Multifamily Real Estate: This is a relatively illiquid asset. However, this illiquidity can be a strength because it often prevents hasty selling and encourages long-term holding, which can yield better returns.
CDs: While more liquid than real estate, they do tie up your money for the term of the CD. Withdrawing early can lead to penalties.
Money Market Accounts and iBonds: Both offer better liquidity than CDs and real estate, but there may be certain conditions or limits on withdrawals.
#3. Tangibility & Control
Multifamily Real Estate: One significant advantage is the tangibility of the asset. You're investing in brick and mortar. Additionally, with real estate, there’s potential control over value-add opportunities, like renovations or better management practices that can increase property value and rental income.
CDs, Money Market Accounts, and iBonds: These are intangible assets. They don’t give the investor much control over the asset's performance.
#4. Tax Benefits
Multifamily Real Estate: Offers depreciation which can offset rental income, thus providing potential tax benefits. Additionally, when selling, there's an opportunity for tax-deferred exchanges.
CDs, Money Market Accounts, and iBonds: Generally, interest earned is taxable, and these instruments don’t provide any specific tax advantages like depreciation.
#5. Risk Profile
Multifamily Real Estate: Real estate has its risks, such as market downturns or property damage, but multifamily properties often weather economic downturns better than single-family homes. Plus, diversified tenant bases reduce the risk of total income loss.
CDs: They have low risk, as they are FDIC insured up to $250,000.
Money Market Accounts: While slightly riskier than CDs, they're still considered a safe bet, especially if within FDIC limits.
iBonds: Extremely low risk since they’re backed by the U.S. government.
Each investment vehicle has its merits. However, for those willing to engage in a slightly longer-term play with potentially higher returns, tax benefits, and the tangibility of owning a physical asset, passive multifamily real estate investments stand out. It's always essential to consider personal investment goals, risk tolerance, and financial position before making any investment decisions. Consult with a financial advisor to determine the best choice for your unique situation.
Key Takeaways for Growing Wealth:
Potential Returns Matter: Multifamily real estate often offers higher average annual returns (6-12+%) when compared to traditional instruments like CDs, Money Market accounts, and iBonds.
Liquidity vs. Long-term Holding: While liquidity is important, sometimes illiquidity, like in multifamily real estate, can be advantageous. It discourages hasty selling, thereby fostering a long-term investment mindset which can lead to better wealth accumulation.
Tangible Assets Offer Control: Investing in tangible assets like real estate gives investors more control over value-add opportunities. This control can lead to increased property value and rental income, thus enhancing the potential to grow wealth.
Tax Benefits Can Boost Returns: The tax advantages provided by multifamily real estate, such as depreciation, can significantly enhance net returns. This, in turn, can accelerate wealth growth.
Diversify Risks: While every investment has risks, diversifying across multiple tenants, as seen in multifamily properties, can reduce the impact of income loss and thus protect and potentially grow your wealth.
Consultation is Key: Engaging with a financial advisor to align investment choices with personal financial goals and risk tolerance can be instrumental in effective wealth growth.
In summary, while there are various avenues for passive investments, multifamily real estate stands out as a robust option for those aiming to grow their wealth, provided they approach it with a long-term perspective and sound financial advice.
As always, Be Bold, Be Great, and Keep Pushing Forward!
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About Ellie Perlman
Ellie Perlman is the founder of Blue Lake Capital, a commercial real estate investment firm specializing in multifamily investing throughout the United States. At Blue Lake Capital, Ellie partners with both institutional and individual investors to grow their wealth by achieving double-digit returns by investing alongside her in exclusive multifamily deals they usually don't have access to.
A defining factor of Blue Lake Capital’s strategy is founded in utilizing machine learning/artificial intelligence throughout the course of all acquisitions and asset management. This advanced technology enables the company to produce accurate and data-driven forecasting for all assets on a market, property, and even tenant basis. In doing so, Blue Lake is able to lead commercial investments with the full capabilities of today’s technology.
Blue Lake Capital is the sponsor of REady2Scale, a podcast that highlights the assets, processes, and strategies for the multiple approaches to successful real estate investing.
Ellie started her career as a commercial real estate lawyer, leading real estate transactions for one of Israel’s leading development companies. Later, as a property manager for Israel’s largest energy company, she oversaw properties worth over $100MM. Additionally, Ellie is an experienced entrepreneur who helped build and scale companies by improving their business operations.
Ellie holds a Masters in Law from Bar-Ilan University in Israel and an MBA from MIT Sloan School of Management.
You can read more about Blue Lake Capital and Ellie Perlman at www.bluelake-capital.com.