Including an alternative investment like real estate is a critical component of a serious wealth management program. Choosing the right kind of real estate in which to invest exponentially increases the success of your portfolio.
Explore the potential of commercial real estate private equity in Los Angeles with Christina and see how it will transform your wealth management program.
What Is Equity?
In an investing context, equity is a metric used to determine the value of a capital asset. The equity of an asset is calculated by subtracting debts and liabilities connected to the asset from its total value. Establishing the equity of an asset is key for future investments.
Since equity represents the value of a capital asset, ownership of equity translates into ownership of the asset itself; the majority holder of an asset’s equity owns the value of that asset.
Private equity refers to the investment practice of acquiring equity majorities of a capital asset. In doing so, private equity firms acquire executive control that empowers them with larger degrees of asset management. As majority owners of the asset’s value and its equity, private equity investment firms can effectively call the shots on asset management.
There are numerous private equity investment strategies investors can pursue. Private equity firms may specialize in acquiring majority equity holdings of publicly listed companies, turning them into private enterprises; they may fund venture capital endeavors by supporting start-ups with seed capital in exchange for equity.
Finally, there are private equity real estate investment firms that pursue private equity in real estate assets.
What Is Real Estate Private Equity?
Real estate private equity refers to the majority ownership of real estate assets for the purpose of earning an income through asset management. Commercial real estate investments are considered alternative investments, categorically different from publicly traded securities like stocks and bonds.
Additionally, private equity is considered an alternative investment. Real estate private equity is quite different from conventional investment strategies.
What distinguishes private equity and real estate as alternative investments is the fact that they do not have to abide by the strictures set upon conventional investment management strategies. For example, a publicly traded stock acquired through the New York Stock Exchange must necessarily abide by standards set by government regulators like the Securities Exchange Commission in order to participate in the trading nets in the first place — chief among them is registration with the SEC.
Alternative investments like real estate private equity are not required to register with the SEC. Since they do not need to abide by the same guidelines as publicly traded assets, real estate private equity has wider margins of return. Alternative investments are not hamstrung in the same way as publicly traded assets.
However, unregistered investment opportunities like real estate private equity can only take on select investors: accredited investors.
What Are Accredited Investors?
Accredited investors are investors who are sufficiently qualified to participate in unregistered investment opportunities. Accredited investors typically have years of experience, a reliable track record, and significant financial status.
By possessing sufficient wealth, they are able to sustain the potential risks associated with alternative investment opportunities. Whereas holding publicly-traded securities on a company that goes bankrupt won’t put investors on the hook, certain alternative investment opportunities may hold accredited investors liable.
In the wake of the Stock Market Crash of 1929, the federal government formed regulatory bodies like the SEC to protect everyday investors from the financial fallout experienced in the wake of Black Friday. Congress passed the Securities Act of 1933 to establish stronger protections for investors.
However, by implementing these standards, other investment opportunities were made inaccessible under the guise of protecting the American investor. The legislation then stipulated and then expanded upon with future legislation like the Investor Act of 1940, the legal and financial basis upon which alternative investment opportunities operate.
How Do You Become an Accredited Investor?
Section 501, Regulation D outlines the necessary requirements in order to qualify as an accredited investor.
To be considered an accredited investor, an individual must demonstrate these financial criteria:
- Excluding the value of a primary residence, an individual must possess a net worth of one million dollars at minimum. For spouses or partners, a joint net worth of one million dollars qualifies for accreditation.
- Must have demonstrable proof of a minimum $200,000 dollars annual income; $300,000 dollar minimum annual income for joint income between a partner or spouse. An annual income exceeding these minimums must be consistent for the two preceding years as well as the current year.
If an individual meets these qualifications, they are considered to be an accredited investor. There is no accreditation process that makes these qualifications official. Instead, it is incumbent on the investor to prove these qualifications before working with investment opportunities that require accreditation.
Many real estate investment opportunities require accreditation because, as alternative investments, they may not have the same safety nets protecting conventional assets. Nevertheless, real estate investments present strong opportunities for the investors that pursue them because real estate possesses distinctive attributes that set it apart.
What Makes Real Estate So Special?
Real estate is wholly unique as a commodity.
Investors gravitate towards real estate because of the strength and stability set by four core attributes of real estate:
- Scarcity
- Improvability
- Permanence of Investment
- Location
Scarcity
A scarce commodity in high demand is the perfect formula for a high ROI. Supply and demand is a fundamental rule of economics. When demand is high and supply is scarce, value increases. Real estate is inherently scarce for two reasons: Land is a finite resource, and the development of new property is slow.
When land is zoned, developed, and sold, the supply of finite land is permanently altered — new land cannot be created. Development occurs at a slow pace because it is a deeply time-consuming and costly process. Together, this dynamic inherent to real estate keeps property scarce. Property is almost always in demand, whether to serve as housing or for new development.
The baseline scarcity of real estate translates to a baseline value, as demand is rarely surpassed by supply.
Improvability
Conventional investing opportunities do not afford investors the chance to have a direct effect. Real estate allows investors to make an active effort in the value of their effort by virtue of its improbability.
Stocks and bonds have no means by which an investor can value-add; when an investor buys a share of a company, the only means by which its value can rise and fall are through market trends. Real estate is different: Real estate is a physical property, so investors have the opportunity to alter it and thereby raise its value.
Property improvements can be as minor as new tiling on the bathroom floor to complete renovations of a property. No matter the scale, any and all improvements have an effect on the value of the property. Improvability allows investors to actively alter and therefore improve the value of their properties.
Permanence of Investment
Real estate is a strong alternative investment because it’s not only a compelling asset in its own right but presents the opportunity to hold capital permanently with additional investments.
Real estate has high degrees of fixity due to its physical structure. The physical nature of a real estate asset represents capital infusions into the property, holding the value of the investment in the structure itself. In this way, investors can keep their money safe by making additional investments into their real estate assets, which will reliably hold their value.
Investments into a property’s foundational structure (projects like electrical wiring and septic work) are so integral to a property and so enduring that they are effectively permanent, making for increased market stability.
Location
Location plays a profound role in real estate value. Investors, homeowners, businesses, and renters alike give heavy consideration to a property’s location before moving forward.
With such a strong emphasis on location, real estate in a given market can vary from neighborhood to neighborhood. More variance in markets means that investors can be more selective with where they choose to invest.
If the same property is vastly different in price in one area, or if one area shows remarkable progress, investors can make informed decisions to find the best possible assets.
What Are the Benefits of Real Estate Investing?
The special characteristics translate into compelling benefits for investors. Real estate investments earn you a stronger return by supplying reliable opportunities for growth, consistent gains, and loss mitigation strategies.
Here are a few key benefits of real estate:
- Positive cash flow
- High appreciability
- Inflation hedge
- Tax breaks
Positive Cash Flow
Cash flow is a key metric used to determine a capital asset’s ongoing performance. It measures the balance of money going into and coming out of an asset. When more money is coming in, an asset has positive cash flow.
Positive cash flow is a huge advantage for two reasons: firstly, it’s a clear indication that an asset is generating money. Second, it supplies investors with a steady income stream. With this, they can make additional investments in the asset or in other investment endeavors.
Real estate investing presents reliable opportunities for positive cash flow through rental property management. Leases for rental properties necessarily deliver a positive cash flow; monthly rent must exceed operating costs in order to make a profit. With the ability to set the rent price, property owners have more control over their income-producing assets.
High Appreciability
Capital assets with a strong potential for growth make it a compelling investment. Real estate is well-known for its high appreciability: its increase in value over time.
When an asset reliably grows in value over time, investors can confidently expect a more substantial return in the long term. Explosive, short-term gains do not make for a keystone investment in a long-term savings program. Assets that eschew the ups and downs of the market and grow with dogged consistency are integral to effective retirement strategies.
For the past half-century, real estate has maintained steady growth without fail. Brief downturns in the market invariably correct themselves back towards an upward progression. Real estate investing is typically a surefire means to sustain a long-term investment strategy.
Inflation Hedge
Investments that can endure downturns in the market are essential components of a secure, healthy portfolio. Real estate is a critical asset that protects your portfolio from inflation.
Inflation is marked by sector-wide rising prices and a weakening dollar. Tightening budgets keep consumers from trading, which is commonly associated with a sluggish stock market. Worse is the effect inflation has on your savings: as interest is outpaced by the weakening dollar, retirement funds will deteriorate and lose value.
Real estate is a hedge against inflation, meaning it performs well during inflationary periods. It does so in two ways: sector-wide price rises increase the sales price of property and rent. The value of real estate increases with rising inflation; rent absorbs rising prices by passing them on to the tenant. With inflation continuing to affect economies the world over, there’s never been a more important time to invest in real estate.
Tax Breaks
A complete return is one that optimizes gains by reducing losses. Effective investment strategies don’t just pursue strong growth but opportunities to minimize loss. Real estate presents both of these advantages at once due to its many tax break opportunities.
Real estate is a premium alternative investment. But it typically has high upfront costs. In order to encourage investor participation in the real estate market, the government offers a number of tax breaks for real estate investors.
End-of-year tax write-offs, tax deductions through depreciation, favorable long-term capital gains tax rates for longer holding periods, and more combine to offset the high upfront costs of real estate investing. In turn, real estate’s tax break opportunities make it an asset that investors can utilize to pay less in taxes and keep more of their returns.
What’s the Best Way To Invest?
The benefits of investing in real estate are clear. How you get involved in real estate determines how effective your real estate assets will be. Private equity is the most compelling way to gain the benefits of real estate investing.
Let’s explore other means of real estate investing so you can see why.
Property Ownership
Property ownership is a common way investors get into real estate. Individual investors endeavor on their own to acquire income-earning properties that span thousands of square feet, like commercial multifamily properties (five units and above) and apartments.
Others may flip houses for a profit. Individual property ownership is an alluring prospect because, as a solo operation, investors are entitled to 100 percent of their return.
However, going it alone comes with significant drawbacks and increased risks. Property owners don’t have access to the resources to optimize their investments. Managing a property is a serious undertaking: tenant acquisition, making repairs, hiring contractors, and legal consultation are necessities to maximize the property’s potential.
Individual property ownership strategies look great when everything goes exactly according to plan. But investments rarely do, and investors who go it alone can face catastrophic consequences if they don’t have the resources to address problems when they arise.
REITs
Real estate investment trusts appeared in the 1960s to give the average American the opportunity to invest in the real estate market alongside major capital partners and investment banking specialists.
REITs function like publicly traded corporations whose profits are earned through income-earning real estate. Investors can buy shares of a REIT on the exchange and thereby include real estate in their portfolio.
While REITs provide a relatively low-risk opportunity to get into real estate, they don’t net the same caliber of ROI as other real estate investment strategies. REITs are hamstrung by a legal obligation to pay their shareholders 90% of their netted income. That means REITs don’t have the capital to make investments that promote growth.
REITs can make stable, modest gains, but they can’t produce the potential ROI investors might expect from other real estate investment opportunities.
Private Equity
Private equity gives investors the best of both worlds when it comes to real estate investing. Private equity investment companies alleviate the burdens of property ownership. Firms are well-equipped with the resources to manage properties and maximize their returns.
Unlike REITs, private equity firms connect investors with legitimate shares of equity in the assets, opening up the door for a more complete return. Furthermore, private equity funds have the capability to do more with their pooled capital than REITs. This means private equity has the means to pursue stronger gains.
Why Los Angeles Real Estate?
For almost 100 years, Los Angeles has been home to gold-standard, premium real estate and realty on the West Coast. Neighborhoods like Santa Monica, Beverly Hills, and the Pacific Palisades in the Westside region have the most hyper-valued real estate on the planet. Westside real estate are ultra blue-chip assets. Equity in Westside real estate is guaranteed to transform your portfolio.
Invest With the Best in Southern California
Christina has thrived in the Westside region for over 40 years. That’s because our real estate company has the communication skills, the resources, and the network to connect you with the best in all of real estate.
Get started with us today and secure your portfolio with Westside equity tomorrow.
Sources:
The Laws That Govern the Securities Industry | Invest.gov
17 CFR § 230.501 – Definitions and terms used in Regulation D. | Cornell Law School