Families Liking Real Estate Again

By Christiana Cefalu

According to Dani Evanson, the managing director of California real estate investment firm RMA, many of her high net worth clients have historically looked to real estate for aggressive capital appreciation gains. That is, they bought fixer-uppers, added value, and then flipped them, cashing out with a lucrative payday at the end of the effort. No longer. In the quest for a stable source of yield, wealthy families these days are supplementing their fixed income investments with real estate deals that yield a solid, steady return.

Evanson says that client-thinking in the past was, “if it’s going to be alternative or illiquid” they wanted to see returns, from capital appreciation, around the mid-teens. Now, she sees more and more clients investing in quality, low-upkeep properties with the aim of earning steady yields of around 4% to 6%.

“I think people didn’t believe that interest rates were going to stay low as long as they have,” Evanson said, so by now, “they thought their fixed income products would start to bump up.” With all signals pointing to interest rates remaining low for the next few years, however, her clients see real estate as an alternative, fairly low-maintenance money-maker. Private clients have moved “away from aggressive behavior” and are mimicking the real estate investments traditionally favored by long-term institutional investors.

Consider the now popular triple net leases, wherein the commercial tenant, let’s say Taco Bell, is responsible for the entirety of the property’s maintenance, while paying you, the landlord, rent. Triple net leases are attractive to investors because the messy job of maintenance falls largely on the tenant, and, as such, are considered by some the closest real estate equivalent to low-maintenance bonds. Investors can get 4%-5% out of such real estate deals, Evanson claims, compared with 1.5%-2% on their fixed income portfolio. That higher yield makes it easier to tolerate the more illiquid nature of the real estate investment.

The pitfalls? Investors who own or owned Best Buy locations, for example, reasonably thought they had a solid triple net investment. The struggling retailer has been closing stores all year. It can also happen that the value of the property decreases over the course of the investment, and the steady yield you enjoyed won’t make up the difference. Remember, your total return is calculated by adding your annual yield to the property’s capital appreciation when it comes time to cash out.

Multi-family units are another property-type favored by families looking for decent yield. In markets like New York or San Francisco, where demand is high and volatility is low, an apartment could yield 3%-4%. The same asset in rural Texas, meanwhile, could yield 12%, she says, due to risk of finding suitable tenants for properties most likely to get hit in a downturn.

If wealthy investors’ post-2008 concern about real estate illiquidity has been overcome, as Evanson’s observations suggest, that’s yet another sign that the nation’s real estate crisis is ending.

For the original post visit: http://blogs.barrons.com/penta/2012/12/10/families-liking-real-estate-again/