The Art of Passive Real Estate Investments
Investing passively in real estate requires an entirely different approach than investing as the principal.
The best real estate opportunities have a few common, vitally important elements:
- A successful deal sponsor with strong track record.
- A motivated, or distressed seller.
- A great location for the stated purpose.
- Strong Demand & Low Supply for the stated purpose.
- Strong discount to fair market value.
- Optimal entry point in the current real estate cycle.
- Ability to buy into the deal “wholesale.”
The first six elements are self-explanatory.
A motivated seller. Often, “motivated” means distressed. Sometimes, it means less than that. are not “retail” products such as public REITS or RE Capital Partners evaluates real estate opportunities on behalf of institutional and accredited investors. Through our relationships with top sponsors and operators, our pipeline provides us with a broad array of investments suitable for both short and long-term requirements.
These investments include joint ventures, mezzanine financing, and preferred equity positions in commercial and multifamily properties.
Often we work directly with the deal sponsor; however we also review opportunities available on crowdfund sites such as FundRise, RealtyShares, and RealtyMogul.
In real estate, we see many dimensions of risk. These include:
1. National market risk
The real estate market has historically been considered relatively risky. Today, because of technology and “big data,” supply and demand have become more liquid and transparent, thereby stabilizing the real estate market. It generally reacts more quickly and more sensitively to changes in the economy.
2. Regional market risk
The most important characteristic of a building is its location. Defining the quality of the location is something that depends on a number of factors: Surrounding buildings and construction projects, building zone planning, connections to highways and public transportation are the ones you may first look at. It’s essential for any investment to know all these variables, and we include this research as part of our due diligence process.
3. Object quality
High returns can be achieved through savings in maintenance work, property adjustments aiming at satisfying tenant needs, and/or avoidance of expenses related to finding new tenants.
4. Tenant risk
Ensuring that investments have a high level of sustainable returns is an important part of the Real Future sourcing process. There are several ways to secure lease income including: checking each tenant’s credit standing prior to investment, signing long-term tenancy agreements, and/or supporting tenant loyalty through an attractive mix of tenants and a good property location. Tenant risks tend to focus on the likelihood of keeping or losing existing tenants, whereas market risks discussed above give an indication of how easy it is to find new tenants.
5. Financing risk (leverage)
Financial risks are more easily controlled than market and object risks and can be adjusted in order to meet the needs (risk profile) of our clients. The following two parameters can be adjusted:
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Contained risks vary depending on if the investor grants a loan, grants a participative loan, supplies mezzanine financing or purchases regular equity.
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The risk of an investment project decreases if less borrowed capital is used to finance purchases. At the same time, the leverage effect is weakened. Basically, the risk of an investment project decreases if the amount of equity being used to finance the object increases.
Two types of risk become relevant when looking at an investment as part of an overall portfolio.
If you have an investment in a foreign currency and the corresponding exchange rate decreases, profit and sometimes even the investment capital decrease. This risk is not an integral component of a real estate investment. The causes of exchange rate fluctuations are rarely related to real estate markets and should not be attributed to the performance of your real estate investment broker. The investor’s overall portfolio strategy determines the currency diversification to be pursued and to which extent risks should be hedged.
If the performance of two separate investments is not exactly the same, they do not correlate 100%. In such cases the effect of a loss in one investment is partly or fully neutralized by better results achieved by other investments in the portfolio. By limiting the fluctuation of the value of such a portfolio its overall risk exposure decreases. The portion of the investment risk which can be eliminated through such a diversification strategy is called unsystematic risk. As the real estate business does not correlate strongly with other investor markets, the diversification into and within real estate is a must in order to stabilize and optimize an investment portfolio.
Who We Are
RE Capital Partners, LLC is a small equity firm headed by Walter deMilly, who has syndicated, acquired, and managed over $500 million in commercial and multifamily real estate. RE Capital Partners works with a team of experts for each deal we negotiate. We work with our attorneys, due diligence firms, accountants and other professionals to evaluate projects.
While it is common to see references to risk-adjusted returns in offering documents, the fact is that projecting the equity performance of most property types is very difficult, and imprecise. Given that equity is at the top of the capital stack, it is the most volatile part, and hence, the riskiest.
There is no point in looking at high IRRs if the debt coverage, occupancy, stabilization, or local economy can’t be adequately quantified.
Who are our investment opportunities for?
These opportunities are for accredited investors only. If you are a sophisticated and accredited investor familiar with real estate investments, and would like to participate in well-vetted deals which are capable of producing returns of 15% or more, you should join our mailing list so that we can contact you when a suitable o
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