Why Real Estate: Time travel – several of the projects and existing real estate ideas we have access to formed early last year. As a result, they have locked in lending rates in the mid to low 3%s. Well below the rates, we expect to see in the near future. This is a great opportunity to adjoin those projects at lending rates from a time that makes the project more lucrative than the same project financed today. This brief opportunity to piggyback on projects from last year is shrinking right now – but presents a good spot for investors looking to add real estate to do so under the financial conditions of 2021. Cash flow – the conditions for investments in the stock market for the last decade have been great for unlimited growth but are causing stocks to be priced at high P/E ratios. We think there could be a pretty impressive stylistic shift from the desire for growth, to the desire for current cash flow. Why Real Estate Right now: Inflation – it’s in every headline now, but we are of the mind that this inflation correction is decades overdue.  We are in the camp where some elements of inflation have been long suppressed and recent policy actions are allowing that inflation to flow through to the broader economy. Not just the result of the trade war with China, government spending during covid, supply chain constriction, and tax cuts, but the result of decades of accommodative policy for lending has caused inflation to start in equity (real estate markets and stock markets have been on a two-decade-long march higher with record low volatility). Underbuilding – despite the decades of low borrowing costs, the U.S. is still 7.5 million housing units underbuilt. The news this month from both Toll Brothers and Richmond will be slowing the pace of new home construction will only accelerate the widening of that gap. The rising borrowing costs will also remove several buys from the market and leave them paying rent for now. Volatility – We expect a tightening of monetary policy well into 2023/24 with maybe the first “Rate cut” coming in the back half of 2023. This means that markets could return to historically choppy conditions (things have been uncharacteristically smooth for stock markets from 2008 – 2020) as the result of monetary easing and bond buying from the Fed. This means that investors will be looking for the lower volatility that accompanies non-traded cash flow generating investments – this means rents. Why NOT Real Estate: Liquidity – The best real estate ideas we are looking at have major limitations in liquidity. Investors will receive monthly income from the investment, but the ability to exit the investment early is hard. Investors need to be comfortable with the income and liquidity for at least 5-7 years, and if the investment goes to 10 years this could also be a reality. The lack of liquidity keeps out less sophisticated investors, lowers the loss investors take from redemptions, and means that investments have better tax treatments. Taxes – The result of making money is taxed, always.  But getting money from real estate investments means paying income tax (the least favorable tax condition) and for many, this can mean that the total return of the investment is greatly limited. So the best investors in this asset are those who will see their effective tax rate decline in the years to come or are already planning to pay a lower income tax rate. Pre-retirees and retirees are a group that fits well in this space. Not only does it create a new source of current income, to live on, but it also pushes much of the tax ramifications off into the retirement window when taxes are usually lower. Additionally, those who value a higher current income in their InSight-Full® plan – entrepreneurs and investors whose income is more volatile and tax rates are controllable can see some more value in a dedicated real estate portfolio. Income Return Capital Return 5.00% 3.15% 7.00% Fed Tax Rate Tax Loss After-Tax Income Tax Loss After-Tax Income Total Return 37% 1.85% 3.15% 1.17% 1.98% 10.15% 35% 1.75% 3.25% 1.10% 2.05% 10.25% 32% 1.60% 3.40% 1.01% 2.14% 10.40% 24% 1.20% 3.80% 0.76% 2.39% 10.80% 22% 1.10% 3.90% 0.69% 2.46% 10.90% 12% 0.60% 4.40% 0.38% 2.77% 11.40% 10% 0.50% 4.50% 0.32% 2.84% 11.50% The Complete Playbook