Time is your money’s best friend. The farther out your horizon, the greater the opportunity for capital to earn current returns and appreciate over time. With the gift of current cash flow and appreciation of capital, your investment can snowball into a substantial asset base over time. Private real estate investing accomplishes these two objectives by creating current income from rental income, as well as appreciating the value of capital over time from growing income or cash flow of the asset.
If you are an experienced entrepreneur, highly paid professional, have recently sold a business or are retired and looking for income from outside of the public markets, you may be asking yourself, “Is it too late for me to benefit from private commercial real estate investing?”
Nothing could be further from the truth! There’s a time and place for everything, and the past may not have been the best time for you to consider private real estate investments. You may think you’re “too old”, “too young”, “don’t have the time”, or are “uneducated” about the intricacies of private real estate investing.
Some best practices for participating in private real estate investing include having the best investment managers, partners, and deal flow you can find. MLG Capital thinks the best time to get involved in private real estate investing is whenever you’re ready to diversify outside of the public markets!
Am I too old or too young to invest in private real estate?
Financial advisors typically recommend individuals place more emphasis on equity investing during their working years (public markets), transitioning to more fixed-income investments as they retire (bonds, for example). While this boilerplate investment advice can have benefits, it typically ignores the risks of public market investing.
Exclusively investing in equities can ignore the consideration of volatility on your portfolio. A black swan event can cause a short-term negative impact, requiring greater returns to bring you back to even. Think of early 2018 when there was deep sell-off in the overall market. What caused this? How are you protected from unforeseen swings such as this?
In fixed-income investing there is interest rate risk. Say you invest in a bond (at par value) when interest rates are at historical lows. In the subsequent years, if interest rates see a sharp increase, the price of the bond will fall. While you are still generating income from the bond, you’ve suffered a negative short-term impact. This can be especially true in inflationary cycles. The chart below details several “asset class” historical performances through an inflationary cycle.
Private real estate investing has historically had low correlation to the public markets. Due to this, returns generated within private real estate typically display lower volatility than the public sector. In inflationary and rising interest rate cycles, overall returns and risk of capital loss can be mitigated by actively increasing cash flow on assets and by having manageable debt on the property.
Private real estate investing can give your portfolio the best of four aspects of investing: consistent income, low volatility compared to public markets, capital appreciation over time, and preservation of principal.
Regardless of your age, private real estate can be an impactful option for you. Wrapping capital preservation tactics around private real estate investments (i.e. moderate leverage, attractive basis, location and demographics, etc) is always a starting point. If you’re an older investor looking to make your money work harder for you, combining both appreciation and income generation may be a sound strategy to meet your financial objectives. Some folks consider weighting their overall fixed income allocation with private real estate investing. A younger investor may see value in the potential to have assets outside of the public markets, earning consistent returns, and growing the value of their investment over time.
I Haven’t Had Time to Understand Private Real Estate Investing
Building a business or developing your career took years of hard work, savviness, and execution on many opportunities to bring you where you are today. While you were burning the candle at both ends, it may not have been possible to devote the time necessary to think about successful real estate investments.
Now you’ve reached the stage of your career where the focus has shifted to “making your money work for you”, the time has arrived to think harder about making real estate investing part of your wealth planning. There are two primary options for private real estate investments: invest on your own as a sole investor/operator or partner with an established firm as a passive investor. Instead of devoting the time (your most valuable resource) you should carefully consider which option makes the most sense for you. While you consider your business or personal endeavors, leveraging the talents of a successful private real estate investment firm (such as MLG Capital) may be the most convenient and profitable option for you. An experienced investor and operator’s sourcing abilities can provide a greater chance of both preserving capital and achieving targeted returns, as well as get your investment diversified. The chart below shows an example of a “one-off” investment vs. a diversified fund model.
It’s Never Too Late to Start Building Multi-Generational Wealth
After building your own capital base, the next step is building multi-generational wealth. While it’s up to you and your financial professional to prioritize multi-generational wealth and up to your family members to carve their own path, building transferable assets for loved ones will provide greater security and opportunity for them to pursue their dreams.
In estate planning situations, as your wealth grows, there may be opportunity for future generations to enjoy different benefits of private real estate investments. Be sure to speak to your attorney about all the options available to you.
With a history of consistent, low-volatility returns and appreciation over time, private real estate investing may help you achieve the goal of multi-generational wealth. After all, it’s never too late to start building a legacy.