The Incredible Rise of Private Real Estate
Alternative investments in private real estate are not a “one-size fits all” answer to the investment goals of all high net worth investors, yet there are many situations where they can play a relevant role.
Because private real estate typically performs favorably throughout investment cycles and periods of market uncertainty, especially with a trusted and experienced manager, it is viewed as an ideal way to potentially grow and preserve wealth. Therefore, it is continuing to grow in popularity and registered investment advisors (RIAs) are stepping up to the plate to help clients identify worthwhile and trustworthy opportunities in the fragmented world of private real estate.
According to a recent survey conducted by MLG Capital, 93% of respondents were asked about real estate by clients at least quarterly, yet only 27% of RIAs proactively allocate discretionary client funds to private real estate. Therein lies an opportunity.
The fact of the matter is that when RIAs seek investments for clients in private real estate, chances are good that they have considered several investment options. For example, they may recommend that clients not invest more in the stock market because of its unpredictability. Or, perhaps the client requires further diversification and allocating a percent of their portfolio to private real estate (especially when diversified vs single asset) represents a way to achieve that goal.
Regardless of the rationale for investing in the asset class, it is essential to follow a best practices approach before making a decision.
The following items are a bit of advice:
Remember that all real estate is local.
Private real estate has a low correlation to the public market. Real estate – assets, their potential value, tenant opportunities – are all completely dependent on the local market in which they’re located. RIAs should keep this in mind when selecting an asset on their clients’ behalf.
Real estate can be tax advantageous; ensure this is the case for your clients’ finances.
Tax situations vary for each client, and when it comes to real estate investments, the tax advantages can be great if the investing is done well. RIAs may want to liaise with a tax professional or CPA when looking at investment options to determine if this is the case for the clients’ personal financial situation and plans for real estate investment. Ask your real estate partner if they have in-house tax personnel and CPAs, historic taxable income vs cash distribution performance as well.
Remember that any investment return carries a degree of investment risk. Help clients to be prepared.
Whether clients invest in real estate, the public stock market, or even bonds, there’s always risk. Be prepared for this risk by insisting that clients set aside non-invested funds as a cushion to fall back on if needed and help them to manage the portfolio to maintain the level of risk with which they are comfortable.
Prepare for the illiquidity of real estate.
Liquidity is based on how fast you can get your clients’ money back as cash. Real estate is a very illiquid investment, meaning it can take a long time to get money out of an investment. Clients can’t sell it tomorrow at a market price and it could take a long time to sell. There’s a “cost” to not being able to get money out quickly; investors in private real estate are putting their money away, typically, for a longer time without having access to it. Prepare clients for this commitment to ensure that they are able to live the life they’d like while some of their funds are working via investments.
Know how and when to expect distributions.
The goal of any investment is to make more money for your clients than they originally put in. It’s always a risk. But ensure you’ve asked all the questions related to how distributions are allocated: when are original funds paid back, how are dividends distributed, and how is appreciation valued and returned to investors? These are all important to know before making a decision on a private real estate investment.
At the end of the day, you’re the one who has your clients’ best interests at heart; you know their finances, what they’ll need, and what risk they’re comfortable with. But it’s also important to partner with an expert who has your best interest in mind, particularly if you’re new to private real estate investing. Follow these best practices for a great experience, and feel free to contact MLG Capital for additional advice related to your decision!