Today we’re sharing insight from guest blogger Tag Birge, President of Cornerstone Companies, Inc. We hope you enjoy Tag’s wisdom and perspective.
Risks come in a variety of shapes and sizes. A risk I often see companies missing out on today is cash management. CFOs have a tough job trying to decide in what to invest excess cash. Finding income generating assets with low risk is almost impossible. With the inflationary environment, many low risk investments mean the value of that investment will decrease over time. In the past, places like bank accounts, treasuries, and Blue Chip equities had a reasonable expectation of out earning inflation while being very low risk.
Emerging in many markets around the world are negative interest rates. Nearly 1.7 trillion dollars of government bonds are currently yielding less than zero interest. Some have equated this to a “parking fee” for keeping money in a “safe” investment. We have not yet seen negative interest rates hit the U.S., but the very low interest rates and high equity process have put American investors in a kind of “purgatory.”
Many financial experts believe annual returns over the next seven years could be as low as 2% (after inflation) from Blue Chip equities and U.S. treasuries could have negative returns. Historically, U.S. investments have yielded 6.5% returns. What will these low and negative returns mean for American companies? Over time businesses will have to change their investment and cash management strategies to better handle the risks.
Robert Kiyosaki, the author of the financial best-seller “Rich Dad, Poor Dad” has recognized the significant shift in our financial markets by stating that “saving is for losers” when ultra-low interest rates are below the annual inflation rates. Kiyosaki also questions why companies would put money into bonds or savings accounts when every central bank in the world is printing money to try and create inflation and fight the disinflationary affects around the world.
“When I was in my 20s, I could get 15 percent interest on my money. Today, I'm lucky to get one percent. I'm a debtor. I borrow because I'm in real estate. So I'm getting money at 2.5 percent. I just recently refinanced $300 million at 2.5 percent. So debtors are winning and savers [together with US companies putting cash in a bank account] are losing."
In order to take advantage of ultra-low interest rates, many investors are exploring alternative assets such as real estate to obtain returns with leverage that will beat inflation. Historically, CFO’s have largely avoided investments in real estate but increasingly that paradigm may need to be revisited with the current and projected state of interest rates.
Skeptical about investing in real estate? Let me share some of my story and experiences to demonstrate how real estate may be one alternative investment strategy you should consider.
In my role as the CEO of Birge & Held, I’ve found apartments to be a stable investment opportunity for CFOs looking to “park” their excess liquidity in higher yielding alternative assets. We specially focus on the underserved “workforce housing” apartment market in suburban settings. Workforce Housing are those apartment units occupied by middle and lower middle class Americans earning between $35,000 and $55,000 annually.
We believe utilizing long term debt to finance apartment projects can lead to positive returns when debt is used properly. According to a recent report by Freddie Mac, only 10% of the new units built around the country had asking rents at levels considered affordable to half or more of the rental population. Research by Reis Inc., which tracks national apartment trends, forecasts that the national apartment in 2016 will remain strong due to: (i) favorable demographic trends, (ii) strength in the job market; and (iii) the reduced affordability of the housing market. High occupancies have continued to result in healthy rent growth.
For those CFOs and business owners intrepid enough to consider alternative investments for their excess liquidity and/or investments strategies, the apartment market remains an attractive risk adjusted area to place capital. With fixed apartment financing for 35 years close to 3.5%, investors taking on leverage can follow Richard Kiyosaki’s advice and be “today’s winners.”
What other alternative investment options might you consider? Any investment that is not one of the three traditional asset types (stocks, bonds, and cash) would constitute an alternative investment asset. Most are held by accredited, high-net-worth individuals because of their relative lack of liquidity. In addition to real estate, alternative investments include hedge funds, managed futures, limited partnerships in pipelines or wells, commodities, and derivatives contracts.
Along with their traditionally higher returns, alternative investments are favored mainly because their returns have a low correlation with those of standard assets classes (i.e., stocks, bonds, and cash). Because of this, many large institutional funds such as pensions and private endowments have begun to allocate a small portion (typically less than 10%) of their portfolios to alternative investments.
In the ultra low interest rate world we find ourselves in today, CFOs have a duty to their companies to explore all avenues available to them to generate returns necessary to beat inflation. CFOS of small to midsize companies are going to need to consider alternative strategies over the next ten years. Don’t wait until it is too late. Start exploring alternative investment and cash management strategies to help your company better manage and respond to the risk of extremely low or negative returns.
This content was written and shared by guest blogger, Tag Birge.
Tag Birge is President of Cornerstone Companies, Inc. Cornerstone is one of the most active Medical Office Building brokers in the Midwest, and Tag is responsible for the investment and disposition activities at Cornerstone. In addition, he serves as a technical resource for all Cornerstone associates, including marketing, business development, development, leasing, financial analysis, legal and accounting personnel.
Tag is a co-founder of Birge & Held, a national multifamily real estate investment firm located in Carmel, Indiana. Since its inception in 2008, Birge & Held has acquired over 3,900 units and currently manages 3,500 units across 25 projects, representing over $230,000,000 in multi-family assets across the country.
Graduating cum laude from Indiana University with a B.A. in Political Science, and receiving his J.D. from the University of Virginia, Tag practiced law as a real estate partner at Bose McKinney & Evans, LLP in Indianapolis. Tag then entered real estate development as a Senior Vice President of Healthcare at Lauth Property and Group and developed approximately $200 million worth of real estate around the country.
A committed community volunteer, Tag currently serves on the Board of Directors of Bowen Engineering, the Indiana Sports Corp Board, the Building Owner’s and Management Association Board, the Heart of Gold Charity Board and the Penrod Society.
Connect with Tag on LinkedIn.
