The Hunt For Yield Continues in 2015

By

Oh yes, the Baby Boomers are at it again. Being the largest cohort of the population in North American history, we baby boomers have changed every industry and every financial vehicle we have touched.  We witnessed it changing the dynamics of the automobile industry (yes, you can blame us for the mini-van), you witnessed us change the food industry (yes, blame us for the industrialization of food), and you even witnessed us changing the real estate industry.

Now we are changing the demand curve in the financial world. We baby boomers are aging, looking to slow down or even retire; however, it is at the exact time that interest rates are at record lows, returns on bonds and GIC’s are below inflation and our income replacement plans aren’t turning out quite as we expected. In previous generations, the retirement income plan seemed rather simple – take your savings, put it in a nice 7-10% yielding bond, and live off the avails of your hard work.

Today baby boomers will be looking for investments to replace their income, and as the highest net worth cohort in history, who have had the highest average incomes at the same time, most of them will not be settling for below average returns. I call this shift the “Hunt for Yield”.

Baby boomers are looking everywhere for a financial vehicle that will provide the same combination of income and security as a retirement income plan. As they hunt, they are finding fewer and fewer choices.  Because there are so many boomers with so much cash to invest (either within or outside of their RRSPs) the few products that do offer this combination get bought up quickly, thus lowering their inevitable yields.  A vicious circle continues. For example, look at how low the current yield is on government bonds in Canada and the US.

Alternative Investments

This never ending circle is why so many baby boomers are turning to real estate ownership or alternative real estate investments to help fill that income role in their portfolio. When done correctly, property, or investments based on property, can provide a hedge against inflation, a strong and growing income, the potential for leveraging of capital and, in some cases, capital appreciation.

If you are a part of the population who are looking for the income replacement, and stabilizing of your portfolio, I do encourage you to investigate ownership of well-chosen, well investigated, well managed property, or another financial vehicle based on real estate.

I say well-chosen and well managed on purpose as, just like all investment choices, there are good, bad and ugly products out there. Many look great on the surface. They are well marketed, have great brochures, and have seemingly good properties supporting it, yet hide big flaws such as poor management or poor property locations.

This is why it is critical that you take that extra time to complete your diligence and ask the tough questions whether you are buying a property directly or a real estate product or Joint Venture that is supported by real estate.  In fact, it is my belief that you must complete even more diligence on a product’s management or potential Joint Venture partner than you would do on buying a simple piece of property.

But once you have done that diligence and you are truly ready to act, you have a very good chance of sitting back and enjoying the yield you are looking for. Nothing is guaranteed in any investment, no matter what you are told. Herein lies another red flag

The “Guaranteed” Trap

Because this income replacement is so very important to a growing population and because Baby Boomers have had it fairly good in the investment world during their lives, the word “Guaranteed” has become bait to attract the unaware.

We are witnessing a dramatic increase in the number of advertisements, brochures, and sales presentations that are using the word “Guaranteed.” Although it is used to provide potential comfort, I suggest that it should provide you the exact opposite feeling. “Guaranteed Return” scams are everywhere. You know the ones: “Hey it’s guaranteed to give 18%” or “Your cash is 100% guaranteed AND we’ll give you a great income every month.” It has become so bad that the governments and regulators are now advertising on TV to warn people against these types of pitches.

In the financial world and in real estate, nothing is fully guaranteed. And if the word “guaranteed” is included in the advertising, it doesn’t mean I run away. Rather, it means I dig much, much deeper into the potential investment before I ever write the cheque.

Multi-Family Based Investing is Still a Strong Alternative

This hunt for income has led many investors to consider real estate for the first time. Some begin by dabbling in a second house or condo but more often these Baby Boomer investors are moving to owning and operating multi-family properties. This includes owning a multi-family property outright or investing in a financial product that is backed by well-chosen and well managed multi-family properties. Within this area, many are finding not only the increasing income they crave but also the potential upside in their net worth.  This is a great self-preservation strategy, based on demographics and economics.

Many consider the act of owning a multi-family property an alternative investing strategy. However, I have been investing successfully in multi-family properties for well over 15 years in order to create a very strong income with strong capital appreciation.

I also know that the demographics are on my side as the next giant cohort in the population is the Millennials/Generation Y. Many investors do not know that this young group comprises just as large of a percentage of the population as the Baby boomers were. This means that they are about to become the largest influencers on the continent. This is good news for my portfolio as they are just now beginning to enter the rental market thus protecting my overall yields as well as capital. Because the baby boomers are still looking for secure places to invest their money, they are keeping the bond yields ultra-low, which means my multi-family mortgage rates are also at record lows.

That is a winning formula in my world.

Conclusion

We have never before in history witnessed so much capital chasing such low returns. That is why I urge all investors to take time to carefully choose where they place their money. Take that extra time to complete the diligence and investigation on a property or financial product. Do not invest based on a whim or a hot tip.

If you are willing to educate yourself a little more, make it a rule of thumb to do just ten percent more investigative work than the average North American. Doing so will allow you to cut through some of the biases that have been planted in our heads for decades and as a result, you will find that there are some very good investment choices out there that can provide you with that replacement income for which you and many others are searching.

And remember: “Real Estate Should Fund Your Life… Not Be Your Life”

began his investing career in 1985 with a house purchased in Mission, BC. He is Founding Partner and Senior Analyst at The Real Estate Investment Network and currently owns nearly 200 doors in BC and Alberta. A seven-time best-selling author, Don’s expertise and passion for teaching Canadians how to create wealth through real estate are far-reaching and have made an impact on the lives of thousands. You can follow his daily thoughts on Twitter – www.twitter.com/ and on Facebook at www.facebook.com/thereinman.

  {{cta(‘7e3a1adc-814c-414c-9b99-ddd062307042’)}}