Buy Treasuries or Real Estate?

Wendy PattonBusiness Member

Real Estate Consultant · Clarkston, MI · Member since 2009 · 864 posts · 350 votes

3y

Good post with good thoughts - I always have said there are deals in any market. If you buy a DEAL then the situation in the market should not affect it. What i see is too many investors buying deals that are too tight. There is not enough profit in them for any type of issue that comes up or turn in the market. I do the same thing for lending to investors - i make sure they have enough meat on the bone. Many don't. Personally I am investing in some 5% stuff to hold some cash but if i can lend it or buy something that has a good profit I will take it out immediately.

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Nathan Whitson

Member since 2018 · 8 posts · 13 votes

Good insights from all three posts. Things I agree with:

-Real Estate Investing can typically get you a >10% IRR; appreciation, cash flow, amortization pay down, and depreciation.

-The common person isn’t very successful in timing the equities market, or many markets for that matter.

However, the short term market is shaping up to be very different than anything we've experienced in the last 20 years. Some metrics and predictions are trending toward a 30 year historical since we've seen some of this. While not impossible, it's hard to find deals right now. Appreciation is stuck between 5% and -5% in most markets. If you do find a deal based on price, your margins are squeezed because of cost of capital. With interest rates +8%, most deals aren't seeing a positive cash flow. In most cases you are not gettin a >10% IRR out the gate on new investments right now.

When securities are at 5%, you should expect a larger delta in IRR for the extra risk and work/time into other investments. Which is hard to come by right now, as explained above.

I’m not an investment advisor, so I’ll tell you what I’m doing. Since I already have great exposure to the real estate market, I am fine diversifying into the more passive securities while the market normalizes, or at least tries too. The delta needed for the added risk/exposure just isn’t there today. If I was just starting out and in growth mode then I might entertain more of the real estate market right now, having a more long term outlook, but I’m not. If I have enough for cash offers, I will move on those because I think there is some value add there for cash buyers in this short term market.

As of 10/28/23 the bond market is predicting rates +4.5% for the next 30 years, which normally equates to primary mortgage rates close to the 6%. Investment loans likely +7%. If this market is close to being correct then then the delta may not be there in the long term either. Expecting long term IRR of >10% could be detrimental, if this holds. In this scenario for the delta to become more intriguing, the prices of real estate would have to come down more than 10% or so. Likewise, this is one major metric I'm watching right now.

6 Reply

Arn CenedellaPro Member

OP

Rental Property Investor · Greenville, SC · Member since 2008 · 786 posts · 1k+ votes

[email protected]650-575-6114

@Nathan Whitson

Nice post with solid points.

We all will just have to wait as see life, the economy, and real estate market unfold.

I don’t know what the future will bring. I have my opinion and invest accordingly.

👍

Nathan Whitson

Member since 2018 · 8 posts · 13 votes

Right, and much comes from the personal investor and their objectives, now more than ever. For the last 15 years investors didn’t have securities as a viable option, but now at +5% that may fit their risk exposure and time horizon better than long term real estate.

V.G JasonPro Member

Investor · Member since 2022 · 3k+ posts · 3k+ votes

Quote from @Arn Cenedella:

While the 5% “risk free” Tbills looks attractive………….

It also at least partially assumes an investor can time the bottom of the real estate market.

Perhaps one CAN time the market……….

I went to Colgate University for undergrad and then University of Michigan for grad school and ended with a MS in Physical Chemistry. So I have at least a solid level of education and intelligence.

My entire adult career has been spent in the real estate industry starting in 1978…..and have been investing since 1980…….

And I don’t try to time the market………

In my experience:

1. The bottom of the market isn’t known for 6 to 12 months after the fact.

2. When the market turns up, it does so quickly and so the window of opportunity is short.

3. When the market turns up, prices also go up quickly.

We all read stories about immense amounts of capital - dry powder - poised to jump back into the market…….

Assuming there are deals to be had…….I submit for consideration, the retail investor isn’t going to get them……it’s the groups with Millions and even Billions in the bank that will get them……

While returns on multifamily have decreased - at the present time, solid deals run by experienced operators might yield 13% 14% IRRs……….and 16% or 17% annual rates of returns…..

On a 5 to 10 year horizon, I believe investors will be better off continuing to invest in real estate than Treasuries……..

So while parking the money in Treasuries may feel safe - deciding when and where to re-enter the market is a difficult decision.

I believe retail investors will do better investing with a long term horizon - less focus on timing the market or getting a deal - time in the market v timing the market.

Thoughts?

I should pre-face this is different if you're investing for yourself or for investors. I invest strictly for myself(and family).

People look at right what's in front of their nose. It's likely the next 3-5 years will give you a negative yield on real estate from a cash perspective, it's also likely you'll face a smaller yield on appreciation(versus 2020-2022). But what people are missing is when you invest in T-Bills you're getting that up to 52-week exposure(net taxes), you're not getting truly a long-term hard asset.

I'm significantly more confident in investing in equities or real estate for the long term than treasuries. I define long term as least 7 years, ideally in the 12-20 year range. I don't value real estate by necessarily the cash flow it generates(I do mitigate how badly exposed it is), but I value it off the cost to rebuild + quality of parcel of land. I don't believe in (very) good areas we'll see more available quality parcels of land. Those alone from the underlying will keep you healthy. I think the cost to build will be volatile, but net up. If you're able to grab a solid house in a very good area, at or under the cost to rebuild and the cash flow is a meager $100-$300/mo out of the money. Grab it.

The best quality investments in this (relatively) higher rate area for houses is high quality primary residential areas that are suffering due to lack of quality buyers. Make it the rare investment property in an area full of homeowners-- it will rent quick and you will get quality tenants.

Investment(off of previous valuations) for strictly cash flow are going to be priced intrinsic to get RID of it; think about that. Someone is selling something intrinsic(and it's more intrinsic off of their rates) today in an arena when capital is costly and cash is tight. This is isn't what you swing on.

If rates go up, you will be fine cause you locked in lower.
If rates go down, you could re-finance(rather not) but it's likely your price has grown more in value in projected.
If house prices go down, you're in it for the long term. Doubt it depreciates on a 7-15 year curve, but in the small chance it does this why you keep a healthy cash reserve if anything gets tricky on you.
If house prices go up....great.

Allan C.

Rental Property Investor · Member since 2018 · 826 posts · 810 votes

@Arn Cenedella I’m sticking with T-bills until 6 months after fed rates stabilize. Too many optimistic/unrealistic sellers comping their assets to sales over trailing 6 months. While there may be some deals out there, it’s not worth the time trying to find them at the moment.

In the meantime, I'm focusing on reducing opex on my stabilized assets to strengthen NOI. I tend to cycle my efforts between acquisition mode and efficiency mode…and my portfolio could use some TLC after a 10 yr run of acquisitions.

David M.

Morris County, NJ · Member since 2020 · 5k+ posts · 2k+ votes

@Arn Cenedella

While I haven't looked at treasuries specifically, what you are missing is buying bonds/notes/debt at a discount. While you hold it you get a greater effective coupon rate, then when it matures you get the full redemption value as opposed to what you paid for it. The Yield to Maturities that you can get in this environment are staggering.

Much better "risk adjusted" return than real estate given liquidity, effort to maintain (i.e. none), and no speculation / price risk. Yes, there is counterparty risk, but isn't the historical default rate on high yield / junk bonds something like 6% in a depression? You get all the same and perhaps worse being a landlord.

Member since 2019 · 7k+ posts · 4k+ votes

Quote from @Arn Cenedella:

While the 5% “risk free” Tbills looks attractive………….

It also at least partially assumes an investor can time the bottom of the real estate market.

Perhaps one CAN time the market……….

I went to Colgate University for undergrad and then University of Michigan for grad school and ended with a MS in Physical Chemistry. So I have at least a solid level of education and intelligence.

My entire adult career has been spent in the real estate industry starting in 1978…..and have been investing since 1980…….

And I don’t try to time the market………

In my experience:

1. The bottom of the market isn’t known for 6 to 12 months after the fact.

2. When the market turns up, it does so quickly and so the window of opportunity is short.

3. When the market turns up, prices also go up quickly.

We all read stories about immense amounts of capital - dry powder - poised to jump back into the market…….

Assuming there are deals to be had…….I submit for consideration, the retail investor isn’t going to get them……it’s the groups with Millions and even Billions in the bank that will get them……

While returns on multifamily have decreased - at the present time, solid deals run by experienced operators might yield 13% 14% IRRs……….and 16% or 17% annual rates of returns…..

On a 5 to 10 year horizon, I believe investors will be better off continuing to invest in real estate than Treasuries……..

So while parking the money in Treasuries may feel safe - deciding when and where to re-enter the market is a difficult decision.

I believe retail investors will do better investing with a long term horizon - less focus on timing the market or getting a deal - time in the market v timing the market.

Thoughts?

The best product in the market right now is TSLY/QQQY/OARK Yieldmax with 40-50% dividend income:
Why ?
1. I could always hedge even if NAV/stock goes lower
2. I can always average down if NAV goes down
3. With 30-40% yield and dividend reinvestment, the IRR is actually 40%

But of course these are new product so lot to decipher but if one is portfolio manager, this one is not hard to understand.

However, choosing between Treasury vs LTR real estate. I would defensively choose Treasury until 2025.
Once Fed stopped all these non-sense and I would do more selective real estate strategy.

I still do flips but only holds for two years.

Arn CenedellaPro Member

OP

Rental Property Investor · Greenville, SC · Member since 2008 · 786 posts · 1k+ votes

[email protected]650-575-6114

@David M.

Discounted notes and debt are other viable investment options.

They however are not generally referred to as “risk free”.

Risk free generally refers to instruments insured or back by the full faith and desist of the US Federal Govt.

Discounted debt and notes are not in the basket of “risk free” investments.

I also chose Tbills CDs MMA because they are of either short or finite duration. They are more liquid than say buying a 7 year note at a discount.

Accordingly, I did not include them in my post. But yes they are a solid option for investors so inclined.

Based on your tag line, it appears you are a big SDIRA supporter and I would agree owning instruments that pay interest which is taxable as ordinary income in SDIRA is a good use of an SDIRA.

For me, I want to have control my capital. So I want to be an owner rather than a lender. That’s just my personal preference. If you are comfortable turning control of your capital in the form of a loan to some one other than the government, that is AOK just not for me.

Different strokes for different folks.

All good!

Chris London

Property Manager · Raleigh/Durham NC · Member since 2015 · 210 posts · 293 votes

When it was easy to find deals in RE that's what I did.

When index funds (VTSAX) were at a good price, that's what I did.

Now, T-bills at 5%+ so that is what I do.

I suspect in 2024 I'll pivot again.

David M.

Morris County, NJ · Member since 2020 · 5k+ posts · 2k+ votes

@Arn Cenedella

Yup, thats fine.

But, why aren't there any discounted treasuries? Or, do you mean only the short durations?

At least holding the debt keeps you at the top of the capital stack, instead of at the bottom of the capital stack if you are a equity holder. And if you use the public markets, you are still pretty liquid.

Member since 2023 · 120 posts · 26 votes

If you're pleased with 5%, absolutely... Or 15-17% on rental. Ye, it's not bad.

@Carlos Ptriawan, TSLY/QQQY/OARK seems like an interesting product but you always have the risk the ETF drops in value.

@Arn Cenedella It's a good point you're mentioning about the very good deals not being available to retail investors but the good thing about real estate is that this is only partially true. Deals are everywhere and creativity forms our boundaries.

I'd like to hear some quick thoughts on this, as I'm planning on setting up a business -

(I've studied Private Equity at Imperial College, real estate investment at Oxford University, and have a background in real estate finance in Europe. I want to make an actual impact for retail investors in the market I'm choosing)

I'm planning on offering partnerships with builders in their spec home projects, meaning track records exist of virtually identical projects, sale time is foreseen + costs and sales price at a quite a high level. I'm already setting up the financing for the builders, so there will be a financing package with each builder's projects. Ownership is maintained of the project by the investor throughout the cycle of 7-10 months. Only in strongly expanding areas (main focus SWFL). Leveraged IRR 100%+ for top builders, 30-80% for more standard builders, depending much on financing conditions. Would there be an interest? Any thoughts appreciated

Member since 2019 · 7k+ posts · 4k+ votes

Quote from @Magnus Wikström:

If you're pleased with 5%, absolutely... Or 15-17% on rental. Ye, it's not bad.

@Carlos Ptriawan, TSLY/QQQY/OARK seems like an interesting product but you always have the risk the ETF drops in value.

@Arn Cenedella It's a good point you're mentioning about the very good deals not being available to retail investors but the good thing about real estate is that this is only partially true. Deals are everywhere and creativity forms our boundaries.

I'd like to hear some quick thoughts on this, as I'm planning on setting up a business -

(I've studied Private Equity at Imperial College, real estate investment at Oxford University, and have a background in real estate finance in Europe. I want to make an actual impact for retail investors in the market I'm choosing)

I'm planning on offering partnerships with builders in their spec home projects, meaning track records exist of virtually identical projects, sale time is foreseen + costs and sales price at a quite a high level. I'm already setting up the financing for the builders, so there will be a financing package with each builder's projects. Ownership is maintained of the project by the investor throughout the cycle of 7-10 months. Only in strongly expanding areas (main focus SWFL). Leveraged IRR 100%+ for top builders, 30-80% for more standard builders, depending much on financing conditions. Would there be an interest? Any thoughts appreciated

With yield max we should always hedge it , put it in collar , or averaging down

Member since 2023 · 120 posts · 26 votes

@Carlos Ptriawan How would you hedge it?

Member since 2019 · 7k+ posts · 4k+ votes

there are two ways ( i am considering you folks already advanced in hedging).

TSLY is optionable so you could always make it delta neutral position, in essence for each 100 share you establish one bear risk-reversal spread (sell 1 atm call long 1 atm put).

If your broker doesn't allow option you could hedge TSLY with TSLS (short tsla) with ratio of 95:5 so your position has much less volatility esp. during bear market.

You just need little bit of math to understand this and reduce the volatility.

Btw 95% of TSLY holding is Treasury as well so you can take advantage of Treasury too when investing with TSLY

The TSLY dividend is 4% Monthly that's why I like it so much. You make money if stock going up and you can still make money if stock going down.

Member since 2023 · 120 posts · 26 votes

@Carlos Ptriawan Not bad.

Steve Vaughan

Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes

Quote from @Chris London:

When it was easy to find deals in RE that's what I did.

When index funds (VTSAX) were at a good price, that's what I did.

Now, T-bills at 5%+ so that is what I do.

I suspect in 2024 I'll pivot again.

Exactly. Risk/effort vs reward analysis on an ongoing basis.
Most RE to me right now looks like a falling knife.
Specific deals may be worth it with favorable creative financing or cash. But with risk-free couch returns so high, both must be exceptional.

4 Reply

Member since 2019 · 7k+ posts · 4k+ votes

Quote from @Steve Vaughan:

Quote from @Chris London:

When it was easy to find deals in RE that's what I did.

When index funds (VTSAX) were at a good price, that's what I did.

Now, T-bills at 5%+ so that is what I do.

I suspect in 2024 I'll pivot again.

Exactly. Risk/effort vs reward analysis on an ongoing basis.
Most RE to me right now looks like a falling knife.
Specific deals may be worth it with favorable creative financing or cash. But with risk-free couch returns so high, both must be exceptional.

Yep there are bunch of REiT and mortgage REIT that's traded below book value even, it is even easier to buy those cheap real estate company.

the volatile market in CRE right now is very crazy , like valuations moved down to 2005 level !

How could a bank survived I don’t know but I really respect some of you guys in financing industry that can weather this earthquake. I realized 15 percent of mortgage lender already closed the store in this past two years ..

2 Reply

David M.

Morris County, NJ · Member since 2020 · 5k+ posts · 2k+ votes

@Magnus Wikström, you looking to do this in the USA, or outside/internationally?

@Carlos Ptriawan NVDY is the sister to tsly, right? just based on nVidia. They are an interesting product set --- if they do avg 40% yield and the price drops 40%, you've still broken even on a gross scale (actually net as well in the short term)... Don't you find it "interesting" you can option a security is doing options? lol

@Steve Vaughan I agree. Its been "funny" to me how people are "sold" on how real estate "always goes up." But so does the stock market --- both when looking at the large time scales. But, people perceive that you lose money in the public markets, but can't in owning real estate. But, I know many investors who have lost money investing in real estate, including myself. There are fidiciary advisors for the public markets that investors don't trust, but they implicitly trust various social media influencers and everything online about real estate.. (sigh)

Steve Vaughan

Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes

Quote from @Carlos Ptriawan:

there are two ways ( i am considering you folks already advanced in hedging).

TSLY is optionable so you could always make it delta neutral position, in essence for each 100 share you establish one bear risk-reversal spread (sell 1 atm call long 1 atm put).

If your broker doesn't allow option you could hedge TSLY with TSLS (short tsla) with ratio of 95:5 so your position has much less volatility esp. during bear market.

You just need little bit of math to understand this and reduce the volatility.

Btw 95% of TSLY holding is Treasury as well so you can take advantage of Treasury too when investing with TSLY

The TSLY dividend is 4% Monthly that's why I like it so much. You make money if stock going up and you can still make money if stock going down.

Thank you for providing some price hedge 'options' for TSLY, Carlos.
The -8% over the past week and -21.6% over the past month price performance has me flinching.
Buying opportunity or falling knife?

Member since 2019 · 7k+ posts · 4k+ votes

Quote from @David M.:

@Magnus Wikström, you looking to do this in the USA, or outside/internationally?

@Carlos Ptriawan NVDY is the sister to tsly, right? just based on nVidia. They are an interesting product set --- if they do avg 40% yield and the price drops 40%, you've still broken even on a gross scale (actually net as well in the short term)... Don't you find it "interesting" you can option a security is doing options? lol

LOL
Yes NVDY is another product of Yieldmax.
For these product you need to hedge it accordingly so it is as close as deulta neutral as max as possible LOL so price volatility would not impact you that much.

You could also do something like this if you cant do option: if you purchase 100 NVDY shares, you short 3 to 7 NVDIA shares periodically.

In my larger portfolio I'm doing the same, if market started to have risk on, I add 20% SDS or PFIX to hedge my portfolio.

I also have different portfolio for ETF that has yield above 20% both IRA and traditional account. Key is keep hedging those when market has risk=on like today.

Member since 2019 · 7k+ posts · 4k+ votes

Quote from @Steve Vaughan:

Quote from @Carlos Ptriawan:

there are two ways ( i am considering you folks already advanced in hedging).

TSLY is optionable so you could always make it delta neutral position, in essence for each 100 share you establish one bear risk-reversal spread (sell 1 atm call long 1 atm put).

If your broker doesn't allow option you could hedge TSLY with TSLS (short tsla) with ratio of 95:5 so your position has much less volatility esp. during bear market.

You just need little bit of math to understand this and reduce the volatility.

Btw 95% of TSLY holding is Treasury as well so you can take advantage of Treasury too when investing with TSLY

The TSLY dividend is 4% Monthly that's why I like it so much. You make money if stock going up and you can still make money if stock going down.

Thank you for providing some price hedge 'options' for TSLY, Carlos.
The -8% over the past week and -21.6% over the past month price performance has me flinching.
Buying opportunity or falling knife?

Like I mentione, I do hedge it whenever I purchase. When I purchase , I short the underlying as well so even if it goes down the volatility does not affect me that much. Do like 95:5 - 90:10 ratio between TSLY and TSLA, or put collar option.

Member since 2023 · 120 posts · 26 votes

@David M. I'm looking to do this in the US, but I'm still not sure if I will target Swedish/Nordic investors or US investors. Hence it would be interesting to hear thoughts. It wouldn't be possible to do anywhere else in the world and get those nr's other than the US, thanks to the financial market. Why I'm hesitant towards the Swedish market is because they're extraordinarily locally focussed, and very risk averse. I'm slightly afraid of competition, going towards US investors, and running a higher risk of investors trying to bypass the middleman.

Ivan Terrero

Investor · Naples, FL · Member since 2016 · 256 posts · 75 votes

@Arn Cenedella

Sell options on SPY, credit/ debit spreads...