We have been in an historically low interest rate economy for several years now. While this is good for homebuyers, it makes it difficult to find suitable investments that produce sufficient discretionary income. Interest earned on bank accounts is scarcely visible. Dividend paying stocks can be volatile. Corporate bonds lock in dividend yields, but lose principle when the Fed raises rates. Is there a safe harbor investment that also pays a respectable amount of annual income? The answer is Yes! Private equity real estate.
Even knowing exactly what qualifies as private real estate can be confusing. In layman’s terms, it means direct ownership in a piece of physical real estate, such as retail shopping centers, an office building, apartments and senior housing, or self-storage facilities, with the intent of making a profit. Individuals can invest in private real estate by acquiring assets actively as a direct buyer, or passively with a private real estate investment firm, or an online crowdfunding website. Here are three good reasons to consider that now is a good time to consider private real estate.
1. Cash is King
Private equity real estate can play a pivotal role in risk diversification while paying acceptable levels of income. How? Rental income has some stability, because rents are set by contract, typically for a year or more. What’s more, these rents are available to investors with tax advantages. Each time periodic cash flow from real estate is paid to investors, it’s likes a pay day, and locks in a return on your investment. Investors don’t have to give it back, unlike with stocks, prices can swing down before you harvest an unrealized profit. Also, come April 15th, depreciation from private real estate allows investors to report less taxable income than they received, boosting your after-tax returns. In today’s low interest rate environment, prudently underwritten real estate can be a reliable source of attractive amounts of annual income.
2. Protection from the Storm
Compared with a volatile stock market, real estate can protect you from the storm. Most stock equity markets had a down year in 2018, with the S&P 500 index falling 6.2%. Most of the stock gains during 2018 were forfeited in the wild market swings of December. By contrast, values in the real estate sector appreciate slowly over time, which is why real estate investments are less volatile than stocks or public funds. Taken as a whole, public and private real estate has generated superior risk-adjusted returns.1 As an alternative asset with limited price volatility, private equity real estate can help preserve wealth when financial storms appear on the horizon, and markets come under stress. Private real estate takes the emotion and panic out of investment decisions. When using proper levels of leverage, real estate can weather volatile markets, eliminating the distress decision to sell or hold, protecting your investment from the storm.
3. Debt Financing Enhances Returns
Using debt financing when rates on long-term mortgages are less than purchase yields on real estate, investors benefit from positive leverage. This condition enhances the cash return to investors. This may be why lending institutions will loan against real estate, but not stocks. They understand very well that a proper debt to equity ratio on a stabilized commercial property, peaks their interest and they enter into loan agreements. The investor benefits from increased cash returns, and over time, from the pay-down of principle on the debt financing.
Investors may need to rethink their strategic asset allocation
Maybe it’s time to rethink your strategy and increase your amount of investment into private real estate. Before you do so, it’s imperative that you understand the how’s and why’s of private real estate investing. We are here to help you. Never make a hasty decision to invest. Always get the facts until you understand how they apply to your situation. Ask questions and get acceptable answers. Call us and we can help guide you through this process.
1. Between 1978 and 2016, public REITs averaged close to 12.87%, while the S&P 500 generated 11.64%.
Colina Real Estate Partners is a private real estate investment firm providing investors with opportunities to invest in commercial real estate properties that are professionally managed. Typical properties include, retail shopping centers, restaurants, multifamily and senior housing, office buildings, self-storage and single tenant net lease properties. Minimum investments start at $50,000 for qualified investors.