Think you’re too busy to enjoy all the benefits that come with Real Estate Investing?
It’s no secret that the wealthy and institutional investors are heavily invested in commercial real estate.
As an alternative investment, real estate has ideal characteristics as an inflation hedge: yield, leverage, and appreciation. It does well in upwardly trending markets, continues to pay even as you wait out market corrections and typically declines less than stocks in downturns.
For those skeptical about commercial real estate’s appeal, one only need look to the investing habits of ultra-high-net-worth individuals (UHNWIs) – defined as those with $10M of investable assets. A recent survey of Tiger-21, a peer-to-peer network of one such group of UHNWIs, revealed that its members consistently invest 30% of their total investable assets in commercial real estate. Israelson, David (May 16, 2018), “Why the Wealthy are Heavily Focused on Real Estate,” retrieved from https://www.theglobeandmail.com.
Interestingly; although heavily invested in commercial real estate, most UHNWIs eschewed the direct investment route – preferring instead to defer to the expertise of others.
Given the merits of commercial real estate investing, where do the uninitiated begin, especially those who are time-constrained? Fortunately, the real estate investable universe is vast, providing opportunities to participate in numerous ways, at multiple price levels, and in various geographic locations. We’ve narrowed down the most common ways an investor with little time and without bottomless pockets can get started with commercial real estate investing and the pros and cons of each.
Pros: By partnering with a local investor on small local deals, you can invest in a known commodity in your backyard. Yields can be attractive.
Cons: Diversification is limited since you’re bound to a specific market and asset class. Scalability is also limited since the local investor typically flies solo and doesn’t have the personnel or infrastructure in place for large scale operations.
Secured Private Lending
Pros: Typically, good fixed returns.
Cons: Secured private lending becomes costly when a deal goes south since foreclosing on the property is both time consuming and expensive with significant legal costs. Plus, if you lend in borrower-friendly states like New York, foreclosure can take years, which leaves you with a non-performing investment longer than you intended.
A turnkey investment involves collaborating with an investment group where you provided the financing on a property (i.e., taking out a mortgage in your name) with the group handling the rest – from acquisition, to management and disposition. You split profits from income and appreciation with the turnkey company.
Pros: No expertise required, no rehab, no tenant management, no need to deal with disposition.
Cons: The vast majority of turnkey arrangements yield low returns after taking into account the long list of fees and expenses charged by the turnkey companies including acquisition fees, due diligence fees, management fees, disposition fees, etc. When factoring in inflation, most turnkey arrangements result in negative net returns. Moreover, you’re dependent on the turnkey company’s information and property management company for the accounting of expenses. These sound attractive but did you ever ask yourself if these are such great deals, why doesn’t the company keep them or obtain financing themselves? That’s because the vast majority are making their money from the fees and expenses.
Pros: Most REITs are Public REITS, which have a low cost of entry, allowing participation for as little as the cost of one share of the REIT’s stock. REITs allow participation in the commercial real estate class without the typical entry costs. Also, REITs are required to distribute 90% of their taxable income to investors.
Cons: Public REITs are exposed to Wall Street volatility, and mismanaged REITs may not distribute any income.
Real Estate Stock, ETFs, and Mutual Funds
Pros: Low cost of entry.
Cons: Like all public equities, subject to Wall Street volatility and highly correlated with the broader economy.
Private Companies like Four Peaks
Pros: Can participate in commercial asset class without expertise or market familiarity at a fraction of the cost of direct investments without sacrificing much yield. Transparency allows for access to fund managers to align personal investment objectives and philosophy with those of management and the company. Investment in multiple assets or funds enables diversification across geographic markets and asset levels. Diversity of compensation options including hybrid structures involving equity with preferred returns and debt with profit sharing.
Cons: No control over management.
Of all the ways to invest in commercial real estate, UHNWIs by far prefer investing through private companies – avoiding the market volatility associated with public REITs and real estate-related stocks, mutual funds, and ETFs. Due to the transparency not seen in the public sector, wealthy investors are able to interview managers and perform necessary due diligence to make informed investment decisions, aligning their own investment goals with those of the fund’s.
Happy to defer to the expertise of others, UHNWIs turn over their capital and sit back and watch their money grow. And thanks to recent legislative changes like the JOBS Act, commercial real estate investment opportunities in private companies like Four Peaks are no longer exclusive to the well-connected, wealthy investors.
For investors lacking time, private real estate investment companies are ideal for generating the types of inflation and recession-protected returns the wealthy and institutional investors have been enjoying for decades. Discover how you can partner with Four Peaks today, so you too can sit back and watch your money grow.