I’m not an expert real estate investor. I’ve owned each of the principal residences I’ve lived in over the past 25 years, and they’ve all done reasonably well for me. But real estate is not the focus of my portfolio, and beyond the old adage about “location, location, location,” I have little in the way of secret wisdom or guru-like tips to pass on to real estate investors.
The wealthy people I know, however, are another story. Many of the smartest, wealthiest people I have ever met have made millions in real estate. Real estate is something they talk about often, and when they do, I listen.
The following four “profiles” describe some of the different approaches high-net-worth (HNW) individuals are using to invest in real estate.
The developer
Many HNW real estate investors are real estate businesspeople. They tend to be highly experienced investors with detailed knowledge of a particular market, along with a vision for what a piece of property could be (as opposed to what it is now). They’re prepared to take big risks. But they can reap equally big rewards.
Investors with neither the mindset nor the capital for development can still invest like a developer by putting money behind publicly listed companies in this line of work. Firms related to development (engineering firms, for example) are another possibility.
The income investor
Like the developer, the income investor takes a businesslike approach to real estate. But the business is more conservative, with less focus on vision and more focus on balance sheets, cash flow and cap rate. These investors seem to be in it for the long haul, and many times, with the intention of handing down through multiple generations.
Investors of more modest means can easily take the same approach. There are several REITs that focus on apartments and long-term tenants, both in Canada and the U.S.
A diversified portfolio of them could make an intriguing income investment. Accredited investors can also consider investing via limited partnership structures.
The opportunist
Legendary value investor Benjamin Graham talked about putting his money into “cigar butts”: companies that had been beaten up and discarded but still have a “few good puffs” in them. That’s a good analogy to what many HNW investors are doing with real estate.
Since 2008, the prime target for this type of real estate investing has been U.S. housing. With prices down 50% or more from their all-time-highs in Sun Belt states such as California, Arizona and Florida, dozens of HNW investors I know have bought condos, houses, apartment buildings and commercial property. There is nothing to stop investors of more modest means from doing the same, either through direct purchase or a U.S.-focused REIT.
The loaner
Some HNW investors have decided to invest in real estate not by owning, but by loaning. Instead of buying property, they’re funding mortgages, investing in private real estate financing pools or by backing companies that do the same.
It’s a good way to diversify. It’s also a good way to move up the capital structure: mortgage holders generally take precedent over equity holders if a project goes sour. And, of course, mortgages and real estate debt can be good income generators, too.
There are several publicly traded securities that offer exposure to mortgages and other financing pools.
Many Canadian mutual fund companies offer mortgage loan funds. Limited partnerships are also an option for accredited investors. •
