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ACCREDITED INVESTORS KNOW THE BENEFITS OF DIRECT REAL ESTATE INVESTING

According to Forbes, the vast majority of millionaire investors either made or retain their wealth in real estate. In our experience, the sophisticated and most successful investors elect to invest directly in real estate, not real estate investment trusts (REITs) . REITs give indirect and diluted real estate exposure. Shares represent ownership in the companies invested in real estate, not direct ownership in real estate. REIT investors have little or no knowledge regarding what they actually own and shares trade on the same exchanges as common stocks . They are paper assets, not actual real estate, thus their prices tend to be volatile and  closely correlated with common stocks, and in our opinion they afford no meaningful diversification . Additionally, some REITs don’t invest in real estate at all, but rather mortgage backed securities (MBS) or even other real estate companies.

Direct ownership of specific investment properties offers a potential solution for many investors.  Direct investing in real estate creates ownership of specific properties the investor can visit before and after taking ownership. 

Well-informed real estate investors know the differences between stock trading and direct real estate investing. They may invest in stocks, but according to Financial Planning Magazine, 64% of accredited investors now utilize direct investing or private placements primarily in real estate. Many also use Direct Participation Real Estate (DPRE) – an asset class non-correlated with stocks and bonds – to potentially grow wealth, create income, preserve wealth, and reduce taxes.

DIVERSIFICATION & DPRE

Why do so many accredited investors use Direct Participation Real Estate (DPRE)? Unlike paper investments , DPRE investments are hard assets and non-correlated with paper assets like stocks and bonds. Therefore, the results of what that can provide is likely the driving force behind the popularity of DPRE. To reiterate, DPRE investments offer the potential to build wealth, produce income, preserve wealth, and deliver tax advantages.

The key to creating true diversification comes from using fundamentally different kinds of investments, not just different kinds of securities . Limiting a portfolio to different kinds of stocks, for example, may not work because stocks are paper assets that trade in auction markets . Paper assets tend to change in the same direction at the same time – their returns are usually highly correlated – and the auction markets in which they trade amplify price volatility , which often distorts value.

We believe direct real estate investing can help create true diversification in which asset returns change independently. DPRE investments represent ownership of specific investment properties. They are no longer considered “alternative” investments when directly invested in because of the long list of potential benefits they provide. DPRE investments don’t trade in auction markets like the shares of many real estate investment trusts (REITs) and other securities. Rather, investors purchase DPRE in private placements. This is perhaps why 64% of accredited investors now utilize direct investing or private placements to access the real estate asset class.

THE REAL ESTATE SWEET SPOT

If we accept the diversification value of real estate, then the next question is: What kind of real estate? We can start to answer this question by ruling out some kinds of so-called real estate investing:

• Real estate investment trust (REIT) shares are once removed from real estate ownership because REITs don’t involve real estate ownership; rather, they represent ownership of a business that may or may not own real estate.

• Shares of real estate mutual funds and exchange-traded funds (ETFs) are even further removed from real estate. Fund shares represent ownership in investment companies that buy shares of real estate companies that may or may not own real estate.

• Flipping real estate and ownership of residential properties like homes and duplexes might offer a suitable investment for some people. However, owners assume all the risks the properties and renters impose. They can also be time-consuming, or the cost of hiring a property manager can diminish or even eliminate positive cashflows.

We believe passive DPRE investments offer more net benefits than the aforementioned. There are many different kinds of DPRE investment properties.  In our opinion, demographic and economic trends favor the growth and income potential of thoughtfully located and designed senior living communities and multi-family apartments. Based on our research and experience, this represents the real estate “sweet spot”. These private placement investment properties can capitalize on the growth of the senior population, cross-generational preference for renting, and a residential supply shortage.

There is another unique aspect and to our knowledge we’re the first to identify it. The senior living space offers opportunities for Socially Responsible Investing (SRI) or Impact Investing . Invest well while doing good. Our aging population needs our help. We believe nothing could be more socially responsible and have more of a positive impact than being part of the solution to our senior living crisis.

THE TRIFECTA

All investing imposes risks. This is especially true for investors who try to speculate about future trends.

We reject speculation. Rather, we prefer to capitalize on trends with momentum.

We’ve witnessed and documented certain economic and demographic trends. These trends have history and persistence. We call the three dominant trends a “Trifecta”: The Trifecta of factors positively affecting apartments and senior living.

• Senior population growth: Growth in the proportion of seniors started years ago. Demographers project a higher senior population than we’ve ever seen.

• Rising cross-generational demand for renting: More baby boomers, Millennials, and post-Millenials (Generation Z) now favor renting over homeownership. The trend has persisted for a while, and we believe a reversal would be like trying to stop a speeding train.

• Short supply of rental units: Construction has failed to keep pace with rising demand among the three generations.

To us, using the trifecta to help guide investment decisions is like choosing the escalator to let the trends do the work (instead of choosing the stairs). In our opinion, the trifecta points to direct real estate investments in senior living communities and multi-family apartments. Ownership in these investment properties comes about through direct investing via private placements. We encourage accredited investors to use the experience and knowledge of our real estate investment team to gather all the pertinent information necessary for you to make a full informed and educated decision.

THE TRIFECTA & DIRECT PARTICIPATION REAL ESTATE (DPRE)

Our analysis of the trifecta – senior population growth, rising cross-generational demand for renting, and a short supply of rental units – leads us to believe opportunity in real estate investing rests squarely with direct investing in 1) market-rate apartments and 2) senior living communities.

Market-rate apartments are rental units free from rent price-control laws or subsidized rents. This kind of investment property appears well-positioned to capitalize on the supply shortage compounded by growing rental demand. If the supply-demand gap persists, we expect it to drive increases in both rental income and the value of multi-family apartment properties.

Senior living communities, like market-rate apartments, capitalize on the trifecta. The greatest impact comes from the demographic trend. The trend is supported by our senior population’s preferences as well as necessity for communities designed to accommodate a range of needs from independent living to memory care. In turn, this segment also provides Socially Responsible/Impact Investing opportunities for those who recognize the need to help solve the growing senior living crisis.

To start your direct investing journey in DPRE, take advantage of the skill and experience of our real estate investment team. We encourage you to learn if and how DPRE might serve your personal investment objectives.