To Help You Identify the Right Strategy for Your Portfolio
The commercial real estate investment universe is vast, offering individuals a wide variety of vehicles and products—each with a unique risk-return profile. Understanding the basic categories within the real estate investment ecosystem is an important first step in identifying the right investments for your portfolio. Here we’ll review four primary dimensions that can help frame your thinking.
1. Public vs. private
Publicly traded real estate securities are listed on an exchange and offer daily liquidity and pricing. They’re open to any investor with a brokerage account and have low minimum investment amounts.
Private real estate investments are not traded on public exchanges. Private investments are typically open only to accredited investors and can have substantial minimum investment amounts.
Public real estate investments are generally more liquid and accessible than private real estate investments. While this liquidity can help individual investors enter and exit positions more easily, it also creates the potential for more volatility—often driven by moves in the broader stock market.
To offer their securities to the public, issuers must adhere to formal registration, listing, and reporting requirements. Private investments and funds are typically structured so that they are exempt from many reporting requirements.
For investors who can accept the relatively lower liquidity profile and have an appropriately long investment horizon, private real estate can offer several benefits, such as the potential for lower volatility, greater diversification, and lower correlation to other asset classes. Furthermore, some market participants believe private markets offer investment managers more opportunities to generate attractive risk-adjusted returns.
2. Active vs. passive
This categorization speaks to your role as an investor. If you’re an active investor in a real estate project, then you have hands-on responsibilities. It’s up to you to find, finance, and manage the property. You’re responsible for handling tenants, toilets, trash, and taxes.
If you choose to delegate certain responsibilities to a third party, such as a property management firm, your role will still be relatively active, as you’ll be on the hook for vetting and supervising the service provider.
Passive investors take a hands-off approach to the day-to-day operations of a real estate investment. This tactic requires less time and expertise from the individual investor. The heavy lifting is handled by a fund manager or sponsor, who ideally has extensive skill and experience in the field.
Active investments allow you to have more control over the real estate investment, which can translate to greater returns if you’re successful, but also greater downside if you run into trouble. Regardless of the outcome, active investors can expect to expend considerably more time and effort than passive investors. Passive real estate investments typically allow you to take less risk and, because they’re less time intensive, allow you to tap into a wider range of investment opportunities.
3. Debt vs. equity
You can sort the real estate investment universe into debt and equity instruments, a familiar concept within the context of corporations. Take Ford, for example—you could invest in the company’s debt by buying its corporate bonds or invest in its equity by becoming a shareholder.
The same framework applies in the real estate universe. Real estate debt investment returns are driven by cash flow streams generated by interest payments on loans backed by real estate assets. Equity investments are a “claim” on a real estate asset’s income and value. Compared to debt investments, equity real estate investments have the potential for higher risk and higher return.
4. Single asset vs. diversified
A real estate investment could offer exposure to one particular asset, or multiple assets. The designation impacts the investment’s risk-return profile. An investment in a single asset represents a concentrated bet on a specific property, whereas a multi-asset investment can deliver the benefits of diversification, including reduced risk and volatility.
Single asset real estate investments are often accessible through syndication deals, where investors pool their capital to purchase a single asset and then share in the profits. Most real estate funds are multi-asset investments, offering exposure to various real estate properties.
Additional noteworthy categories
You’ll also see real estate investments grouped according to other criteria, such as:
- Strategy type – e.g., core, core plus, value add, opportunistic, development
- Geographic location – e.g., Southwest, Sun Belt, urban core; Tier I, II, III
- Asset type – e.g., multifamily, industrial, office, hotel, mixed use
Lastly, you might categorize real estate investments according to their “wrappers,” or the different ways underlying real estate exposures can be packaged into investment vehicles, such as REITs, ETFs, or limited partnerships.
While a full discussion of these categories is beyond the scope of our coverage here, these are important designations related to the characteristics of a given investment—including its potential risk and return.
Examples
- Purchasing and renting out four-unit apartment building – One of the most traditional ways to invest in real estate is to purchase an individual property and rent it out.
- Public vs. private: Private. You’ll buy and sell your investment in the private market, not via a public exchange.
- Active vs. passive: Likely active. If you’re the hands-on landlord, it’s 100% active. Contracting with a property manager can reduce the burden, but you’ll still be managing key aspects of the investment, such as the purchase, financing, and eventual sale.
- Debt vs. equity: Equity. Since you’re purchasing the property (with or without a mortgage), this is an equity investment. Your returns are based on rental income and capital appreciation.
- Single asset vs. diversified: Single asset.
- Public vs. private: Private. You’ll buy and sell your investment in the private market, not via a public exchange.
- Investing in a CMBS ETF – An investment designed to track the results of an index composed of commercial mortgage-backed securities (CMBS). CMBS represent interests in pools of commercial mortgages.
- Public vs. private: Public. Shares of the ETF are traded on a public exchange.
- Active vs. passive: Passive. As an investor in the ETF, you won’t have any control over the portfolio of real estate investments. (The investment is also passive in the sense that it tracks an index and does not actively try to beat it.)
- Debt vs. equity: Debt. Although you’re holding shares of an ETF, underlying returns are driven by pools of real estate loans secured by commercial properties.
- Single asset vs. diversified: Diversified. The ETF likely has hundreds of holdings.
- Public vs. private: Public. Shares of the ETF are traded on a public exchange.
- Investing in the syndication of a large multifamily apartment complex – An investment offering fractional ownership of a specific real estate property, as commonly seen on crowdfunding platforms.
- Public vs. private: Private. You’ll buy your investment in the private market, not via a public exchange.
- Active vs. passive: Passive. The sponsor is in control; individual investors have a hands-off role.
- Debt vs. equity: Equity. You might invest as a limited partner or buy membership interests in an LLC. Returns are driven by the property’s income and capital appreciation.
- Single asset vs. diversified: Single asset.
- Public vs. private: Private. You’ll buy your investment in the private market, not via a public exchange.
- Investing in a Qualified Opportunity Fund – The 2017 Tax Cuts and Jobs Act established the Qualified Opportunity Zone program, an initiative designed to lift Americans out of poverty and revitalize struggling areas. The program spurs economic development and job creation in more than 8,700 census tracts by offering significant tax advantages to those investing certain eligible capital gains into Opportunity Zones through Qualified Opportunity Funds.
- Public vs. private: Most likely private. The vast majority of Qualified Opportunity Fund investments are purchased in the private market, not via a public exchange.
- Active vs. passive: Passive. The sponsor is in control; individual investors have a hands-off role.
- Debt vs. equity: Equity. You’ll likely invest as a limited partner or buy membership interests in an LLC. Returns are driven by income and capital appreciation.
- Single asset vs. diversified: Either. Some Qualified Opportunity Funds have just one asset, while others are diversified.
- Public vs. private: Most likely private. The vast majority of Qualified Opportunity Fund investments are purchased in the private market, not via a public exchange.
Building an understanding of the various classifications within the real estate investment universe is an essential part of becoming a successful real estate investor. With a solid framework in place, you’ll be better positioned to identify the right investments for your unique goals.
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About Caliber
Caliber – the Wealth Development Company – is a middle-market alternative asset manager and fund sponsor with approximately $2 billion in assets under management and development. The Company sponsors private funds, private syndications, as well as externally managed real estate investment trusts (REITs). It conducts substantially all business through CaliberCos, Inc., a vertically integrated asset manager delivering services which include capital formation and management, real estate development, construction management, acquisitions and sales. Caliber delivers a full suite of alternative investments to a $4 trillion market that includes high net worth, accredited and qualified investors, as well as family offices and smaller institutions. This strategy allows the Company to opportunistically compete in an evolving middle-market arena for alternative investments. Additional information can be found at CaliberCo.com and CaliberFunds.co.
Click here to see Caliber’s current property portfolio.
If you would like to speak to someone about diversifying your retirement accounts, contact us at [email protected] or call (480) 295-7600 to schedule a call with a member of our Wealth Development Team.
If you would like to learn more about Opportunity Zone Investing, Caliber has put together a special guide that cuts through the myths and misconceptions and outlines the benefits, the risks, and the upcoming deadlines you must know to be able to participate. Get access to the guide here.
Investor Considerations
The information contained herein is general in nature and is not intended, and should not be construed, as accounting, financial, investment, legal, or tax advice, or opinion, in each instance provided by Caliber or any of its affiliates, agents, or representatives. The reader is cautioned that this material may not be applicable to, or suitable for, the reader’s specific circumstances, desires, needs, and requires consideration of all applicable facts and circumstances. The reader understands and acknowledges that, prior to taking any action relating to this material, the reader (i) has been encouraged to rely upon the advice of the reader’s accounting, financial, investment, legal, and tax advisers with respect to the accounting, financial, investment, legal, tax, and other considerations relating to this material, (ii) is not relying upon Caliber or any of its affiliates, agents, employees, managers, members, or representatives for accounting, financial, investment, legal, tax, or business advice, and (iii) has sought independent accounting, financial, investment, legal, tax, and business advice relating to this material. Caliber, and each of its affiliates, agents, employees, managers, members, and representatives assumes no obligation to inform the reader of any change in the law or other factors that could affect the information contained herein.
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