Alternative Investments for family offices.Personal OpinionsON ALTERNATIVE INVESTING: REAL ESTATE

June 1, 2021

A common challenge with starting alternative investing is knowing exactly how to begin, or where. 
Everyone-including you and me- typically wants the same thing, lowest risk; highest reward.
And trust me it’s not bad to want that, no judging from me, it’s just…not very realistic.

Think of the investment market like a surfer at sea. The surfer doesn’t always get the biggest waves to ride because sometimes the sea just doesn’t bring them.

So what does the surfer do instead?

The surfer learns how to ride whatever wave comes irrespective of the size. This way every wave is worthwhile small or big.
It’s the same with alternative investing, the trick is knowing when and how to catch and make the best use of whatever wave the market brings.

This post focuses on the Real Estate market. Why the real estate market? Well, why not?
Sometimes it’s tricky, sometimes it’s not but it’s mostly a pretty straightforward approach investing in real estate, once you get to understand its unique characteristics.

Physical Characteristics that differentiate it from the others:

  1. Immobility: Now you’re probably going to say “but some parts of land are removable” and that is true, but, the geographic location of any parcel of land is not.
  2. Indestructibility: Land is durable and indestructible. (Still a good idea to insure against earthquakes if your land is in a disaster hotspot).
  3. Uniqueness: No two parcels of land can be exactly the same. And I don’t mean shape or size. I mean geographically.

Economic Characteristics that influence its value as an investment:

  1. Scarcity: How you ask? Well even though land is everywhere, we can’t make more.
  2. Improvements: Physical work done on the property that affects its value is called an improvement. It’s like enhancement surgery, but for real estate.
  3. Permanence: Once real estate is improved, the total resources expended represent a sizable fixed investment. Even though a building can be torn down, improvements like drainage and sewer systems tend to be permanent because they can’t be removed (or replaced) economically.
  4. Location: One of the most important economic characteristics of land. The where is just as important as the what in this case.

So you can see how real estate is possibly the most familiar type of alternative investment and for good reason, or reasons because I can think of three profitable ones off the top of my head already:

  1. It can turnover huge profits through rental income.
  2. Huge profit through increase in property value.
  3. Even though the least likely of the three, yet it’s still a viable possibility that you can earn royalties for any discoveries made on your land like mineral resources etc.

Simply put, real estate is everywhere and always improving.

So how exactly can you go about investing in real estate or becoming a “Landlord” (No, unfortunately you don’t get to use it as a prefix to your name or be addressed by it).

Investment can be done directly, or indirectly and there are 5 simple ways you to do this:

  1. RENTAL PROPERTIES
  2. HOUSE FLIPPING
  3. REAL ESTATE INVESTMENT GROUPS
  4. REAL ESTATE INVESTMENT TRUSTS
  5. ONLINE REAL ESTATE PLATFORMS

For the purpose of this post we will be focusing on numbers 3 and 4 only, respectively.

REAL ESTATE INVESTMENT GROUPS (REIGs) 

The ideal for those who want to own without having to deal with the rigorous responsibility of managing it. That’s what the REIG is for.

Now it goes without saying that investing in REIGs requires a lot of capital and access to financing.

REIGs are like small mutual funds for rental properties. In a typical REIG, a company buys or builds a set of apartment blocks, then they allow investors to purchase these blocks through the company, hence joining a group of owners.

Of course a single investor can have multiple units of the built living spaces, but the company managing the group also manages all of the units, handling maintenance, advertising vacancies, and interviewing tenants. In exchange for conducting these very important tasks, the company takes a percentage of the monthly rent.

A standard real estate investment group lease is in the investor’s name, and all of the units pool a portion of the rent to guard against occasional vacancies. To this end, you’ll receive some income even if your unit is empty. As long as the vacancy rate for the pooled units doesn’t spike too high, there should be enough to cover costs.

PROS CONS
The maintenance responsibilities are someone else’s burden to bear. Probability of vacancy depends on market factors.
Income and value appreciation, which means more income. Similar fees as mutual funds.
  Susceptible to unscrupulous managers.
REAL ESTATE INVESTMENT TRUSTS (REITS)

This one is for the investors who want portfolio exposure to real estate without a traditional real estate transaction.

A REIT is created when a corporation uses investors’ money to purchase and operate income properties. REITs are bought and sold on the major exchanges, like any other stock.

REITs are a solid investment for stock market investors who desire regular income. As an advantage over the aforementioned types of real estate investment, REITs afford investors entry into non-residential investments, that are generally not feasible for individual investors to purchase directly.

More important, they are highly liquid because they are exchange-traded. In other words, you won’t need a realtor and a title transfer to help you cash out your investment. In practice, REITs are a more formalized version of a real estate investment group.

Finally, when looking at REITs, investors should distinguish between equity REITs that own buildings, and mortgage REITs that provide financing for real estate and dabble in mortgage backed securities (MBS). Both offer exposure to real estate, but the nature of the exposure is different. An equity REIT is more traditional, in that it represents ownership in real estate, whereas the mortgage REITs focus on the income from mortgage financing of real estate.

PROS CONS
Dividend paying stocks. Leverage associated with traditional rental real estate does not apply.
Long term cash producing leases.  

Choosing real estate as a primary alternative investment strategy can be as satisfying as it is lucrative and as with any investment, there is profit and potential, whether the overall market is up or down.

Remember the skilled surfer who knows what to do with every tide?

Being untethered from the securities market gives it an advantageous position for portfolio diversification ahead of the other alternative investment options that many family offices can utilize.

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