Private real estate investment offers a number of potential positive enhancements for your investment portfolio. While some of these are unique to MLG Capital, they’re still worth noting here as they could greatly affect the aggregate performance of your portfolio. Here are the top seven.
1. Low Market Correlation
Low correlation with public stock markets is one of the biggest benefits of private real estate investment. This term references the way that investments are related – or correlated – with the public stock market. High market correlation means that an investment will follow a very similar pattern as the stock market; when the market goes up, so does that investment. Low market correlation means that the investment has little to do with the public stock market and the various fluctuations the public market can experience. Allocations to private real estate can, at times, be a great tool for individuals and their portfolios due to this low correlation.
2. Dividends plus Appreciation
In private real estate investing, there are a number of ways to see returns. We’re most familiar with MLG Capital’s returns, so we’ll share our return strategy here as an example of how investors see both dividends and appreciation in their returns.
Dividends refer to the cash flow that is generated from a property. For example, if an investor purchases (individually, or as part of a fund) a retail building, the rent amounts paid by tenants in the location would generate cash flow, producing dividends.
Appreciation is the profit gained when the building is sold. Depending on the investment strategy applied to newly acquired properties (this is a good question to ask your investment manager when considering investing), your money may also be applied to making building improvements. This can potentially lead to stronger appreciation when the building is sold, since building improvements can result in a property that produces higher cash flows.
3. Value-Add Investment Strategy
The investment strategy I talked about above is often referred to as a value-add strategy. This refers to the strategy of purchasing a building or property that needs a little work or updating. Perhaps the opportunity comes from prior owner mistakes, errors, or missed opportunities. The strategy is to invest in updates to the property, or to correct past errors and missed opportunities.
This can yield higher dividends, since an owner can charge more rent for an updated property, as well as higher appreciation (in theory), because an updated building, or building with corrections to missed opportunities, will typically sell for more money.
MLG believes that the potential for increased rents must be carefully considered when analyzing a potential investment. For example, MLG Capital acquired a 698 multi-family property in the Minneapolis, MN area in September of 2015. This property realized, on average, $723 per unit in monthly rent.
The property was in need of interior upgrading, exterior upgrades, community center upgrades, and overall management/operational improvement. Surrounding this property were other properties that had been recently renovated, or newly constructed, realizing rental rates in the range of $1,100- $1,500+. Upon investing approximately $20,000 per unit in interior, exterior, and common area upgrades, rental rates have grown to rise to $1,050+ which was conservatively below our competition.
This is the investment strategy MLG Capital uses for a number of reasons. First, we’re experts in real estate – so our models, research, and planning are all focused on getting higher returns specifically from real estate deals. Secondly, this strategy improves the building itself and the community it’s in – and everyone wins in that scenario. And third, but most importantly, it’s the best thing for our investors; after all, if our investors aren’t successful, then why are we doing it?
4. Actual, Real Assets
The underlying value of real estate is that you’re buying (investing in) actual, real property. You can literally kick your asset. In the stock market, you’re trading paper. In real estate, you’re investing in the actual building, not just the value that people put on that company.
5. Tax Advantages
There are tax advantages to investing in real estate. While I won’t dive into them all in this post (that’s another topic altogether), I’ll simply state that the primary function of any real estate investment is to create tax advantaged returns for investors. Here are 4 common tax implications for private real estate investment.
Diversifying your investment portfolio by having your money in different types of accounts – such as stocks, bonds, and real estate – can help with an investor’s overall risk profile. Private real estate investment is a nontraditional investment type that can be very beneficial to an investment portfolio. Since private real estate has a low correlation to the stock market and doesn’t depend on bond investments, private real estate offers an attractive alternative through which to realize potentially higher returns while still diminishing the risk of investing exclusively in the stock market.
7. Expert Real Estate Managers
This benefit is one that not many firms are doing, but MLG Capital is; I mention it here because it’s one of the main reasons our investors are interested in our way of doing things. While many private real estate investors purchase a building themselves and are then forced to learn how to manage it (often, not well – after all, it’s not their area of expertise!), investors into MLG have a team of expert real estate managers to depend on.
An experienced real estate manager knows how to acquire and retain renters, make building updates to see the most returns, utilize tax efficient strategies, and keep the building running efficiently until it’s time to sell it. That’s why we’re able to see appreciation on the buildings themselves; we have expert real estate managers to rely on.
Private real estate investment enhances your investment portfolio in a number of significant ways. It’s one of the reasons we’re so passionate about this option for our investors. We know you have a number of places you could invest, but we believe in (and have proven) the value of private real estate investment for our clients.