US Treasury Love Affair
With today's treasuries whispering sweet nothings of 5% returns, who wouldn't be tempted to flirt with the idea of a risk-free romance? It’s the financial equivalent of a steady relationship in these volatile times. So, when I am approached with the following query (which I hear weekly), "Why invest in hard assets like private real estate when US treasuries are giving me 5% and keeping me liquid?", I can't help but offer a broader perspective.
Let's sit by the fireside and consider this: Investing in treasuries is akin to a summer fling—thrilling, but often fleeting when it comes to long-term fulfillment. Private real estate, on the other hand, is more like a committed relationship that grows stronger over time, building wealth and beating inflation in a way that US treasuries can only dream of.
As someone who’s family has been in real estate since the 1950’s, I must admit, my heart is a bit biased. But even through the lens of adoration, the financial prowess of hard assets like real estate stands firm.
Hard assets are physical, tangible assets that hold intrinsic value due to their practical utility as it provides shelter, space for business, and various other uses that are “essentia-l” to human activity and economic production. And when acquired wisely, real estate often appreciates in value over time and can provide returns that outpace inflation, making it a solid investment for protecting purchasing power.
Why It's Time to Reevaluate Our Love Affair with Treasuries:
The Illusion of Safety: While treasuries come dressed as the epitome of security, let's not forget they tend to shy away in the face of inflation, leaving us to hold the bag of diminishing purchasing power. Holding onto treasuries over the long-term is like holding onto a melting ice cube, and over time, fiat trends towards zero.
A Limited Love Affair: Sure, that 5% yield is alluring, but it's a one-dimensional return. Real estate, with its multifaceted returns—cash flow, appreciation, principal paydown, and tax benefits—offers a more profound and rich connection.
The Beauty of Tangibility: Unlike the ephemeral nature of paper assets, real estate is a tangible paramour that often appreciates with time. It’s a relationship where you can actually see and touch your investment.
Tax Benefits: The tax code practically serenades real estate investors, offering benefits such as depreciation, which aren’t available to the lovers of treasuries.
Impactful Returns: Let's not forget the joy of improving communities and the planet through hard assets like real estate—returns that are more than just numbers on a page.
To simplify the comparison and reduce the need for detailed validation, let's examine a straightforward scenario comparing the potential 10-year outcomes of investing $500,000 in U.S. Treasury securities versus the same amount in well-underwritten real estate:
Treasury Investment:
Initial Investment: $500,000
Average Yield: 4.7% (on a 10 year treasury)
Tax Rate: 35% on interest, resulting in a net yield of 3.055% after taxes.
Inflation Adjustment: With an annual inflation rate of 3%, the adjusted net yield effectively becomes .055%. This highlights the insufficiency of treasuries to maintain purchasing power, with the investment value increasing to $502,750 over 10 years.
Real Estate Investment:
Initial Investment: $500,000
Nominal Return Rate: 12% annually, adjusted to about 9% when considering 3% annual inflation.
Value Before Tax after 10 Years: Grows to $1,769,821.
Capital Gains Tax: 20% on the profit ($253,964), applied to the gain of $1,269,821.
Post-Tax Value: Approximately $1,515,857.
This example does not include real estate-specific tax benefits like depreciation, which could further enhance net returns. The comparison aims to show a clear directional trend towards long-term growth and enhanced purchasing power. By focusing on a generic yet informative overview, the intention is to illustrate significant opportunity costs and the long-term benefits of each investment path without delving into overly complex calculations.
Now, don't get me wrong, treasuries have their place. I hold cash in treasuries. They're the financial equivalent of a reliable friend who’s there when you need them, especially when short term liquidity is my top priority. But if I’m looking to build a legacy, to really dance with wealth creation, and have a real impact in the world, a hard asset like quality real estate is the partner who sweeps me off my feet.
Gino Borges | Co-founder & Managing Partner | Essentia Capital Partners
This is not intended as a solicitation for funds or an investment offering. This is for information purposes only.
