Continuing with the real estate investing strategies based on your financial goal, we are going to cover the “Wealth Protection” strategy.
Investment Goal: Wealth Protection
If Warren Buffet can lose $11 billion on Wall Street, no one’s money is safe from taking large losses. This was the situation facing this legendary investor last year— and even more shocking was how “Buffet and his investment team’s performance was likely not much worse than everyone else’s (fortune.com).” In fact, during the same timeframe, the entire S&P fell by a staggering 10.1%!
If even the most-experienced investors can fall victim to large losses from playing the stock market, why not invest in a more secure asset class instead? After all, the “Oracle of Omaha’s” negative experience just shows that in life, a little protection can go a long way.
Nowhere is this protection more important than when it comes to precious resources like your hard-earned money. Many people are guaranteeing themselves a more prosperous future by investing in real estate portfolios designed to achieve capital preservation.
Capital protection portfolios can be thought of as a means of securing your financial fortress, from the long-shot investments which can lead to money loss. This strategy recognizes that some investments are designed to be more conservative to ensure that money is available— and not at risk of disappearing— when you choose to reach for it.
Stock Market Volatility
Understandably, many people lack the stomach and patience for the large swings associated with the stock market; and stock market investing often times seems akin to building a foundation on less than solid ground. Last February, the stock market was down 12.5% year-over-year, and then climbed up into the double digits. Its constant volatility isn’t ideal for investors looking for stability when it comes to their investments.
But What About Bonds?
Bonds are typically associated as the safer alternative to the stock market, but interest payments from bonds are taxed higher than any other investment income and most bonds only pay interest semi-annually— with some not paying any interest whatsoever until the end of the investment term.
Bonds are therefore, not the ideal choice for investors looking for both wealth preservation and cash flow.
Why Real Estate Protects Your Capital
Unlike traditional investment vehicles such as stocks, real estate is not tied to the stock market or the volatile fluctuations present in major financial markets.
As property investing represents various tangible assets, it’s actually more dependent on local markets instead. What this means is that while the value of stocks and other traditional assets may be declining, in many areas, the value of real estate investments may actually be rising— an instance that’s proven true historically, time and time again.
Benefits of Single Family Rentals
A Real Estate Strategy for Wealth Protection
In order to preserve your wealth, you need an approach that balances your risk, while also providing you with dependable returns. Here are the factors you will need to consider:
Focus on properties in A and B neighborhoods, as these tend to appreciate at a higher rate. This means that not only will you earn steady returns in the form of cash, but when you decide to sell, you will receive your invested capital back and more— as your investment will now be able to be listed at a significantly higher price than what you originally paid.
You can choose either all-cash or financing when purchasing an investment property designed to preserve your wealth. All-cash carries less risk, because you won’t have to make mortgage payments; while financing gives you an opportunity to diversify your portfolio by buying more properties with lower initial investment amounts.
With a financial goal of capital protection, it’s essential that you invest in low-risk neighborhoods, A and B, that are nearby quality services and schools. With low vacancy rates and high renter demand, these types of properties allow you to preserve your wealth until you’re ready to dispose of the assets.
A Sample Portfolio
Now that we’ve explained the strategy, let’s view it in action with a HomeUnion® sample portfolio.
Consider the three single-family rental properties represented below. If you purchased two from a B neighborhood (Raleigh and Charlotte) and one from an A neighborhood (Dallas), you would earn $3,950 in monthly total rent— a solid return for an equity investment of $169K. This strategy would also net you an excellent average appreciation rate of 4.30%.
You’ll notice that as your property value increases and you pay off your mortgage, your home’s equity climbs. By year 15, you would have an earned a total equity of $567,131 from a loan financed over 15 years. Additionally, your cash flow increases to $8,595, since you have no more mortgage payments and full income goes directly into your pocket.
Create Your Own Plan to Achieve Wealth Protection
Hold onto your money until you need it, with a HomeUnion® Wealth Protection portfolio built for just you. When it comes to your long-term financial security, we weigh the critical factors like your risk tolerance and investment goals. Most importantly, we create a strategic portfolio that directly reflects your interest of wealth preservation.