For income and growth investors alike, a good investment portfolio is one that constantly evolves and changes to accommodate new economic and market stimuli. And to say we have had many such stimuli lately would be a serious understatement. From the Covid-19 pandemic in 2020 to the recent Russian invasion of Ukraine, the last few years have been witness to some peculiar world events.
As for 2022, it has not been a pleasant start. The year began as US inflation hit a new 40 year high and it is rapidly heading towards 9% with no sign of stopping anytime soon. We also experienced serious market corrections with all three major U.S. indices with Nasdaq Composite’s swift dip into a bear market being the worst.
Even the typically calm bond market is experiencing a dreadful year due to the ever-climbing inflation and the interest rate increases by the Federal Reserve. According to Bloomberg, the bond market has suffered a loss unprecedented in its history. The yields are just not high enough to realistically compensate for inflation and taxes and protect you from decreased purchasing power in the long run. At the very least, they shouldn’t account for almost half of an investment portfolio like Vanguard’s 60/40 portfolio allocation model suggests.
The predominance of uncertainty and the heightened volatility of the financial markets have made it difficult for investors to weather the storms and safeguard their capital, let alone maximize growth potential and achieve their target yields and returns. Risk management in times such as these calls for further portfolio diversification and it applies both for uncorrelated equity investments and the overall asset allocation.
In the following sections, we are going to make a case for why you should diversify your portfolio into real estate, and present you what we consider one of the best real estate investment options available right now.
The Classic Hedge Against Uncertainty
Real estate has generally been considered a reliable investment, especially for those who are in it for the long haul. Property prices generally tend to go up long-term because populations always never decrease and the demand follows an upward trajectory. Moreover, people need a roof over their heads even in the worst of times. This is while the supply remains somewhat limited.
With real estate, you also have more flexibility than any other asset class. You may purchase a property to flip it but rent it out instead when the market goes down. Conversely, you may sell a rental that has appreciated greatly in value. Rezoning, rehabbing, refinancing, and leasing are just a few examples of real estate’s flexibility. This is unlike bonds and stocks where your options are limited to either holding or selling, and your success depends on factors outside of your control.
However, many investors understandably stay away from real estate investments to avoid the hassles and headaches that come with it. But this can be a non-issue thanks to the flexibility of real estate investment.
Triple Net Lease Investments
Triple net lease properties have attracted a lot of interest and buzz recently. For those who are unfamiliar with the concept, a net lease investment is a commercial real estate investment in which the tenant pays a portion of the property taxes, insurance, and maintenance in addition to rent. The extent of this “portion” is dependent on the type of the net lease contract.
In a triple net lease contract, all of the expenses are covered by the tenant so the net operating income or the annual rent is net to the investor. With these properties, there is lower risk income and cash flow because rents are guaranteed by strong credit tenants usually brand name companies. Additionally, as with any good with a limited supply, commercial real estate prices go up with inflation preserving the investor’s wealth in these highly volatile times.
Not all triple net properties are equal, however, as many real estate agents use the term loosely. And since for most of these investments the lease is already in place and set in stone, going through the provisions thoroughly as a part of your due diligence is key. Naturally, the lease is the ultimate governing document that stipulates who is responsible to pay for what.
In general, and relative to many other investment alternatives, triple net lease investments have a really small risk probability; so long as the properties are properly chosen wherein the fundamentals make sense. These investments hinge on long-term legal contracts impervious to the economic fluctuations induced by law changes, market shocks, price swings, and destabilizing world events. You can also reduce the risks even further by diversifying your investment into a mix of triple net properties through Real Estate Investment Trusts or REITs. These are companies that invest in real estate on behalf of investors. Through REITs, investors with limited knowledge can make the already passive triple net investments even more responsibility-free.