The Basics of Real Estate Investments
-
Upload
luxury-simplified-group -
Category
Documents
-
view
214 -
download
0
description
Transcript of The Basics of Real Estate Investments
Synopsis This document describes the basic principals of and methods used to build a Real Estate investment portfolio. It uses by example our own experience in the downtown Charleston marketplace and as such reflects our experiences and learning over the recent past. We would be pleased to speak with anyone considering this option and to discuss real examples of how investments have performed and strategy has been modified in light of changing economic circumstances.
L u x u r y S i m p l i f i e d , 9 5 B r o a d S t , C h a r l e s t o n , S C , 2 9 4 0 1
Real Estate Investment Strategies and Structures
Real Estate Investments Strategies and Structures
“A qualified group of contractors, brokers and financial analysts based at 95 Broad St, Charleston SC. Our experience in infill development on the historic Charleston Peninsula has set us apart, developed strong community relationships and a strong investment pipeline. “
Track Record An effective Real Estate investment strategy has enabled us to contribute to and benefit from the development boom that that has engulfed Charleston over the past three years. A total infrastructure and capital investment north of $1 Billion on the Peninsula alone.
As one of the largest historical renovation and redevelopment firms in Charleston, we have amassed a land bank of approximately 50 building opportunities within the rapidly developing Downtown corridor South of Highway 17.
To date some $30 million has been invested to produce a market beating return. Land on the Peninsula has become a premium asset during this timeframe and is a valuable commodity now that the construction market has returned in full force. In addition, an influx of job creation, primarily in the technology sector, growing student populations and a large teaching hospital complex have driven demand for housing. Our goal is to help meet this demand.
Figure 1 - Company offices at recently renovated 95 Broad Street Charleston SC. Built circa 1770.
Our investment strategy for the Charleston marketplace has evolved over the last few years and as market conditions have changed.
From buying distressed residential property for the rental market in Mount Pleasant and the Barrier Islands to buying vacant land and renovation opportunities in developing downtown neighborhoods then to developing our own downtown PUD and Event Space opportunities. At each stage we have examined returns on a bi-‐annual basis and reformatted strategy to suit market conditions.
The map above shows properties we have “touched” in the recent past. Either to renovate, restore, rent. Buy/Sell are not included and, as such, many remain within our current portfolio.
There are a few ways for an investor to become involved in the Real Estate market so below we have written a short summary of the target investments themselves and mechanisms used to fund their ownership. The illustration is an example of how, by following a mixture of the strategies outlined below, one Group of investors has developed their portfolio in the downtown Charleston marketplace. It shows mainly single-‐family house rentals though a few duplex and triplex opportunities are included. Properties are mortgaged with rental income covering the mortgage and maintenance costs plus an additional margin.
The second illustration shows either empty land or renovation projects secured by the same investment group. This represents approximately 2 years of further construction work with properties being transferred in to the rental pool as they are completed.
The illustration shows a medium sized real estate investment play but the basic principals hold true right down to one off investments in single properties. i.e. purchase, stabilize, cash flow then withdraw equity using bank funding and repeat the exercise with an additional property. An opportunity or two per year will soon yield a very valuable portfolio given attention to purchase and operating costs.
Types of Real Estate Investment Property Residential
Residential real estate is the most familiar form of real estate because everyone has purchased a house, rented an apartment, or had some interaction with residential real estate. Tenants of residential properties pay rent to live in the property and owners collect rents as part of the lease agreements. Residential properties include single-‐family homes, multi-‐ family homes, apartment buildings, condominiums, luxury properties, and other variations.
We have seen strategies of purchasing several properties and packages of single family homes. In other words, instead of buying, say, an apartment complex, an investor may instead buy a portfolio of single family homes and employ a property manager to produce desired gains from the rental income and appreciation. 3
Commercial
While individuals and families are the typical tenants of residential real estate properties, businesses occupy commercial properties though sometimes there may be a mixture of residential and business in the same building. The commercial tenant abides by leases and pay for use of the property, just like any other resident. These leases are more complex than the leases one might have on a condo or apartment and the agreements can vary to include obligations for the tenant to pay for some or all of the following: property taxes, rent, insurance, required maintenance and up-‐keep, or other expenses that would otherwise be covered by the property owner.
Industrial
The last type of real estate to cover here is industrial real estate. Industrial properties are used for manufacturing, production, assembly, storage, and related activities. Some large institutional investors own industrial properties and lease the property (usually under long-‐term agreements) to businesses that will use it for manufacturing and production.
The goal is always a positive return on investment. Gain can be achieved two ways:
1. Equity – i.e. increase in value after completion of renovation or by opportunistic purchaseor inflation etc.
2. Rental or other operating income, most commonly used to cover holding and operatingcosts plus a small positive return.
For a real estate property, this is most commonly achieved when the property’s value appreciates. Although the recent bursting of the real estate bubble has made some investors question the idea that real estate investments are a sound long-‐term investment, traditionally real estate has been a source of steady gains that at least keep pace with inflation and hold tangible value. One simple explanation for why many investors like to hold real estate is that at the end of the day, even if inflation jumps up or the stock market crashes, your property still has some value.
If the real estate property does not appreciate or even loses value, there is still an opportunity to notch a return on investment by renting out the property to businesses or residents. In the wake of the financial crisis and real estate meltdown, for example, many investors cushioned the blow to property valuations by renting out properties. This is especially attractive if the property is purchased with a loan and thus the owner will have to make the monthly payments regardless of whether the housing market collapses or the macroeconomic picture changes. Renting out the property or otherwise monetizing the real estate can help the investor meet loan requirements and, ideally, realize returns on the investment. The income and appreciation qualities make real estate a mandatory allocation in many family office portfolios.
Real Estate Investment Structures
As we touched on above, there are a number of different real estate property types and there are also many different structures by which investors allocate to real estate. We will briefly explore a few of these structures here.
Real Estate Investment Trusts (REITs)
One way of investing at arms length is through what is known as a Real Estate Investment Trust or a REIT. A real estate investment trust (REIT) is an investment company that invests in properties or mortgages and typically provides an income component. REITs trade on exchanges like stocks and bonds, making these securities an easily accessible and liquid avenue for investing in real estate.
REITs must pass through a significant portion of their income as a dividend in order to qualify for special tax treatment. Publicly traded REITs normally invest in commercial real estate, such as apartments, hotels, shopping malls, office complexes, and storage units. REITs are a way to invest in real estate without directly investing in private real estate and managing property. The tax benefits of this structure are often the most important aspect for investors considering a REIT compared to other real estate investment structures.
Real Estate Investment Firms
Similar to REITs, a real estate investment group allows an investor to invest their money with a firm that will then use that capital to make investments in real estate, manage properties, and attempt to produce gains for the investor(s).
Private Real Estate Funds
There are many different private real estate funds that are structured as a limited liability corporation or limited partnership and investors in the fund commit capital that is deployed to purchase various real estate properties and securities.
Private Equity Real Estate Funds
A variation of the real estate fund is the private equity real estate fund, which typically refers to a fund that completes leveraged buyouts of real estate property companies or large
real estate portfolios. The funds are often limited partnerships and the general partner charges a 2% management fee and 20% performance fee, like private equity funds, and invests the capital pool in a number of different portfolio companies or investments with a finite window for exiting (five to seven years typically). The use of leverage tends to “juice” returns and allows the private equity real estate fund to make larger, debt-‐fueled acquisitions. The fund may also be incentivized to improve returns with a waterfall calculation where they receive an increased split as targets become met. 7.5% and 15% IRR would be typical.
A recent development in this area has been Crowd Source or Community Source funds where high net worth individuals pool assets under a General Partner structure to create substantial real estate portfolio’s. This is similar to traditional private equity though with a degree of disintermediation resulting in lower operating costs and an increased profit pass though to the investors.
Individual Purchase
Many high-‐net worth individuals purchase real estate from outside of a pooled fund structure or sophisticated vehicle. These investments are usually taxable, compared to more tax efficient vehicles or tax-‐exempt entities like government and corporate pension funds, endowments, charitable foundations, etc. Of course, there are many other unique features and characteristics of real estate investments.
Acknowledgment
Reproduced in extract and in part from: ”Family Offices and Real Estate | The Family Office Club”
Disclaimer
This presentation has been prepared by LS Group (“LSG”) for the exclusive use of recipient (together with its subsidiaries and affiliates, the “Recipient”) using publicly available information. LSG has not independently verified the information contained herein, nor does LSG make any representation or warranty, either express or implied, as to the accuracy, completeness or reliability of the information contained in this presentation. Any estimates or projections as to events that may occur in the future are based upon the best judgment of LSG from publicly available information as of the date of this presentation. Nothing contained herein is, or shall be relied upon as, a promise or representation as to the past or future. LSG expressly disclaims any and all liability relating or resulting from the use of this presentation.
This presentation has been prepared solely for informational purposes and is not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments. All securities are offered through LSG partner, Turnstone Securities LLC, member FINRA | SIPC. The Recipient should not construe the contents of this presentation as legal, tax, accounting or investment advice or a recommendation. The Recipient should consult its own counsel, tax and financial advisors as to legal and related matters concerning any transaction described herein. This presentation does not purport to be all-‐inclusive or to contain all of the information which the Recipient may require. No investment, divestment or other financial decisions or actions should be based solely on the information in this presentation.
This presentation has been prepared on a confidential basis solely for the use and benefit of the Recipient. Distribution of this presentation to any person other than the Recipient and those persons retained to advise the Recipient is unauthorized. This material must not be copied, reproduced, distributed or passed to others at any time without the prior written consent of LSG.