Maximizing client and partner wealth in real estate investments.

RIAs Embrace Private Real Estate to Weather Storms 

Investing is easy, right, just “buy at the bottom, sell at the top!” As all RIAs know, this is rarely the case and managing client expectations is critical at any point in any market cycle.

Regardless of market cycle timing,  investing in real estate offers a unique set of opportunities, risks and factors that can benefit and supplement all client portfolios, especially when seeking low correlation to the public markets. Fortunately, RIAs can help clients successfully invest in private real estate as a way to navigate today’s market volatility.

According to a MLG Capital survey conducted in 2018 among current RIA relationships,

–       93% of RIAs believe private real estate has a low correlation to the public market.

–       60% of RIAs prefer an asset manager in business for 10+ years.

–        When asked if they believe private real estate has historical outperformed the stock market, 13% said ‘no and I have the data’, 20% said ‘yes, private real estate must have a position in my clients’ portfolios’ and 53% said some form of ‘I don’t know, never looked into it or don’t know where to find the data.’

Bottom of The Market Cycle

Looking at real estate investments purely on a cost basis and making acquisitions during a tough real estate market (such as the one experienced in the years following the Great Recession) is definitely a great opportunity and the market has proven that over the last 5-8 years.

It is important, however, to separate value from purchase price when making any investment. While properties may be selling at multi-year lows (perhaps below replacement cost), this does not always indicate the investment will be successful. An economic downturn can create weak demand for commercial property, which can make it harder to generate sufficient income due to lowered rental demand.

For example, say you purchase a retail property during a market downturn selling at a large discount to replacement cost. The property has a high vacancy rate and is not generating sufficient NOI to cover carrying costs.  On paper, simply bring occupancy to market levels and the property will perform. However, if improper assumptions are made to garner those yields, perception is rarely reality, particularly if the asset manager is not appropriately evaluating the demand for space, regardless of improvement budget.

At the bottom of the cycle, a RIA’s selection of an asset manager is even more critical. An asset manager must have an intensive contingency management plan coupled with experience of having weathered other economic storms. Regardless of market cycle position, real estate investment must be viewed through the lens of “protecting principal at all costs.” While reviewing an asset manager’s underwriting, identify unrealistic or “stretch” assumptions that are contingent upon a deal’s success. If elimination of those assumptions proves to materially and negatively impact deal performance, approach with severe caution. A down cycle can come swift, with limited time to react. Think of an asset like a ship; are you positioned to turn a speed boat or aircraft carrier? Understanding an asset manager’s mobility on individual deals or a fund is a critical discernment point to understanding performance and protection when you need to turn the ship.

To stick with the water motif, as we all know Warren Buffett’s famous quote, “You only find out who is swimming naked when the tide goes out.”

Top of the Market Cycle

Alternatively, although a strengthening commercial real estate market provides fewer value-add opportunities due to cap rate comprehension and pricing expectations, asset managers have a great opportunity to enhance asset value through operating income growth (e.g. rising rent, eliminating redundancies (OPEX reduction).

As the demand for commercial space increases during the top of the market, investors have a greater opportunity to take advantage of market efficiencies. However, a diligent sources strategy is necessary in strong real estate markets. As competition increases for assets, seller expectations increase and therefore buyer assumptions adjust accordingly. At MLG Capital, however, we believe regardless of market strength, there are also inefficiencies to be sought. Underwriting 50- 60 real estate deals per month on average, MLG Capital views the midcap real estate market through a unique lens very few, if any, can match.

A strong, consistent, and expansive  sourcing strategy is key to real estate investing . MLG Capital leverages a rich sourcing network of more than 1,400 relationships nationwide to find the best opportunities across the United States. Marrying a strong market with a unique sourcing strategy to uncover the best available assets can still make for successful investments, even if pricing (on a cost basis) is at multi-year highs.

Moving Beyond The “Market Timing” Mindset

As RIAs move beyond the steep learning curve that comes with  investing in commercial real estate , they begin to understand that you can’t, and shouldn’t, “time” the market. We believe real estate investing is for clients looking to supplement their existing portfolios to build sustainable, long-term growth, with a low correlation to the public market. While it would be ideal to buy properties only at the nadir, and dispose of them exclusively during a frothy market, life (and real estate investing) doesn’t work this way.

You play the hand you’re dealt. Through down markets, we rely on debt strategy, experience and contingency planning. During strong markets, leverage and capitalize on the manager’s sourcing networks to find the best deals among the froth.

MLG Capital bases its  real estate investing strategy  on the dynamics of the market at the time of purchase, viewed through a local and national lens, combined with a critical concentration of growing operating income.  This strategy allows the company to find opportunities no matter which stage of the market cycle we happen to be experiencing. Combining this tailored strategy with a proactive approach to improve cash flow and valuation and not relying on the market to just “buy low, sell high” helps MLG Capital deliver value to RIAs and their clients.

In summary, it is important to partner with an expert who has your best interests 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.

MLG Capital is currently raising its fourth private real estate investment fund,  MLG Private Fund IV LLC *  , a targeted $200 Million equity fund that is accepting new accredited investors through March 31, 2021.  The series of MLG Private Funds were formed to acquire, directly or indirectly, a geographically diverse portfolio of commercial real estate, primarily consisting of commercial multifamily properties, industrial, retail, office, and other opportunities located in strategically identified areas throughout the United States. MLG Private Fund IV launched in October 2018. Combining current investments and pending deals (anticipated to close by 5/15/2019) Fund IV is already targeting to have  ± 1,570,000 commercial square feet and 1,885 multifamily apartment units across 11 geographic areas with more being added.

Since the inception of MLG Capital in 1987, the firm, and entities associated, have had active, exited, or pending investments totaling approximately 18.3M square feet of total space across the United States, inclusive of more than 13,200 apartment units, with exited and estimated current value exceeding $1.6 billion**

MLG Capital’s series of funds target cash on cash yields, quarterly distributions, and appreciation over time for investors in a tax efficient manner.

* This release is for informational purposes only and is qualified in its entirety by reference to the Confidential Private Placement Memorandum (as modified or supplemented from time to time, the “Memorandum”) of MLG Private Fund IV LLC (the “Main Fund”) and MLG 1099 Dividend Fund IV LLC (the “Parallel Fund,” and together with the Main Fund, the “Fund”), the limited liability company agreements (the “LLCAs”) of the Main Fund and the Parallel Fund, each as may be amended and/or modified form time to time, and a subscription agreement related thereto, copies of which will be made available upon request and should be reviewed before purchasing a Units in the Fund. This release is not intended to be relied upon as the basis for an investment decision, and is not, and should not be assumed to be, complete. The contents of this release are not to be considered as legal, business or tax advice, and each prospective investor should consult its own attorney, business advisor and tax advisor as to legal, business, and tax advice. This release does not constitute an offer or solicitation in any state or other jurisdiction to subscribe for or purchase limited partnership interests in an offering. Recipients of this release agree that the manager and offerings, its affiliates and their respective partners, members, employees, officers, directors, agents, and representatives shall have no liability for any misstatement or omission of fact or for any opinion expressed herein. An investment into a private offering is subject to various risks, none of which are described herein

**As of 12/31/2018. Value is consistent of disposed of assets as well as the current internal valuation of currently held assets as of 9/30/2018. Values may not have been reviewed by an independent 3rd party and may be internal projections.

* This release is for informational purposes only and is qualified in its entirety by reference to the Confidential Private Placement Memorandum (as modified or supplemented from time to time, the “Memorandum”) of MLG Private Fund IV LLC (the “Main Fund”) and MLG 1099 Dividend Fund IV LLC (the “Parallel Fund,” and together with the Main Fund, the “Fund”), the limited liability company agreements (the “LLCAs”) of the Main Fund and the Parallel Fund, each as may be amended and/or modified form time to time, and a subscription agreement related thereto, copies of which will be made available upon request and should be reviewed before purchasing a Units in the Fund. This release is not intended to be relied upon as the basis for an investment decision, and is not, and should not be assumed to be, complete. The contents of this release are not to be considered as legal, business or tax advice, and each prospective investor should consult its own attorney, business advisor and tax advisor as to legal, business, and tax advice. This release does not constitute an offer or solicitation in any state or other jurisdiction to subscribe for or purchase limited partnership interests in an offering. Recipients of this release agree that the manager and offerings, its affiliates and their respective partners, members, employees, officers, directors, agents, and representatives shall have no liability for any misstatement or omission of fact or for any opinion expressed herein. An investment into a private offering is subject to various risks, none of which are described herein

 **As of 12/31/2018. Value is consistent of disposed of assets as well as the current internal valuation of currently held assets as of 9/30/2018. Values may not have been reviewed by an independent 3rd party and may be internal projections.

 

Resources:

MLG 1099 Dividend Fund IV FAQ: http://www2.mlgcapital.com/1099FundFAQ

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