Back in 1993 I experienced a small meltdown in the fixed income/mortgage backed securities market. Fortunately I worked for a money management firm that focused on neutralizing risk and adding incremental value through security selections which provided yawn-evoking enhanced returns over a stated benchmark. In 1994 our team successfully raised close to $15 billion in assets – my mantra, “Bonds are Boring.”
Now let’s get down to reviewing definitions:(all will be quoted from Merriam-Webster)
FIXED Pronunciation: ˈfikst Function: adjective Date: 14th century
1 a: securely placed or fastened : stationary b (1): nonvolatile (2): formed into a chemical compound c (1): not subject to change or fluctuation
INCOME ˈin-ˌkəm also ˈin-kəm or ˈiŋ-kəm
Date: 14th century
1: a coming in : entrance, influx
2: a gain or recurrent benefit usually measured in money that derives from capital or labor; also : the amount of such gain received in a period of time
If we pay attention to how these types of securities are defined we wouldn’t expect anything more from them. If you want equity-like returns, stick to equity.
Now let’s apply this to Real Estate. In previous blogs, I reiterated real estate’s traditional role as an inflation hedge and store of value with little liquidity. Not a buy and flip asset or an ATM machine.
REAL Pronunciation: ˈrē(-ə)l Function: adjective Etymology: Middle English, real, relating to things (in law), from Anglo-French, from Medieval Latin & Late Latin; Medieval Latin realis relating to things (in law), from Late Latin, real, from Latin res thing, fact; akin to Sanskrit rayi property
Date: 14th century
1: of or relating to fixed, permanent, or immovable things (as lands or tenements)
2 a: not artificial, fraudulent, or illusory
ESTATE Pronunciation: i-ˈstāt Function: noun Etymology: Middle English estat, from Anglo-French — more at state Date: 13th century
b (1): possessions, property; especially : a person’s property in land and tenements (2): the assets and liabilities left by a person at death c: a landed property usually with a large house on it dBritish : project 45British : station wagon6: farm, plantation; also : vineyard
Real Estate is tangible. We are not growing more of it (other than developments and high rises.) But it is not equity and does not promise double digit returns. It promises something that’s physically existent.
Buy real estate because you need a house to live in and can afford it, or land for farming or passive enjoyment because you can afford it, or commercial building because it makes sense for your business to own real property. It’s real, hang onto it if you can.