The “Side Pockets” of Hedging Real Estate
Next in our “Hedge Fund Investment” series…
The complex nature of hedge fund investing has inspired volumes of theoretical explanation on the directional nature of investing and event-driven strategies. Warren Buffett himself has devoted much attention to the topic. Arbitrage and equity markets and risk parity are buzzwords that economists use when debating the merits of hedge funds.
In the hedge fund paradigm, investments that lack liquidity are place into a separate account by the hedge fund manager, known as a “side pocket account.” In essence, this investment is tracked separately from the other investments in the fund. Provisions for side pocket investments are established in the offering documents for the fund. A limit is usually placed on side pocket investments, based on a percentage of the total assets of the fund.
So what do side pockets have to do with hedging real estate? Everything…
An investor who chooses to withdraw from a hedge fund cannot receive any portion of an asset held in a side pocket account nor can he force the manager to sell an asset held in a side pocket. If the property must be held for a variety of reasons to stabilize value, this will prevent the asset from having to be sold before the fund is able to realize the full potential value of the property. The departing investor will be paid out on the side pocket asset at such time as the asset is liquidated.
In the real estate hedge fund, it is often a reality that a piece of property cannot be accurately valued or is not currently liquid for some reason. The hedge fund manager is paid based on the valuation of investment, using a side pocket account will prevent the overvaluation of a property and the subsequent overpayment to the manager.
A word about valuation… when hedging real estate, the investor must remember that there is not an easy liquid exchange methodology for real estate (unlike securities, bonds, or other assets that are more traditionally liquid). Valuation is a critical part of real estate hedge funds, and this is where many funds got out of hand in the mid 2000s. Consequently, side pocket assets are a cleaner method of approach unless the fund does not allow for withdrawals or the payment of performance fees until there is a disposition event. Various methods of valuation are used when hedging real estate, depending primarily on the nature of the property. We will discuss these in a future article.
Next up, costs and fees involved with hedging real estate…
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NOTE: We pride ourselves on bringing you the most informative, up-to-date, and accurate information possible about the often-confusing world of real estate investing. Nothing we post however is intended to be taken as legal advice. You should always contact a licensed legal professional for information and advice about your own unique investment scenarios.
Artisan Real Estate Group is one of the top boutique real estate firms in Arizona. We provide an end-to-end suite of services to our investor clients, including a full range of residential and commercial real estate services, income property location service, investor services, property remodeling, restoration, and rehabilitation, real estate finance consultation, REO and bank-owned property services, trustee sale consultation and bidding representation, and new home builder services. Our international team specializes in helping investors from all over the world with their Arizona real estate transactions. Our goal is to find the best properties with the highest cap rate and ROI for our investor clients. Contact us today to find out how we can help you grow your personal wealth and investment portfolio. Artisan Real Estate Group, http://www.artisanrealestategroup.com/ or call us at (602)644-1280. Email: info@artisanrealestategroup.com
Do Pets Make Good Tenants?
Next in our “The Role of the Tenant in Real Estate Investing” series…
The real e
state investor in search of tenants often assumes that “no pets allowed” is a standard they should follow. After all, pets are just a messy disaster in a rental property, right?
The answer, surprisingly, is a resounding… WRONG!
In fact, if you really want to attract a fabulous tenant, a dog may be the investor’s best friend!
Pet owners in the United States spend in excess of $6 *billion* per year on their pets. Of course there are rotten pet owners out there, but the reality is that many pet owners – especially those that are willing and able to pay a sizeable security deposit – are some of the most responsible people out there. With the recent foreclosure crisis, many families have recently lost their homes. These families now need to rent a nice home, ideally as much of a home as the one they had, and they probably have pets. They’ve had the pets for years, in their own home. It’s a safe bet those good people and their pets will be just fine in your investment property.
Until recently, it was rare to find any nice rental property that allowed the tenants to have pets. That paradigm is starting to change, however the number is still less than 1%. Allowing pets will instantly provide a significant advantage when renting your property. Being pet friendly will reduce vacancy rates, provide a larger pool of responsible tenants, and – statistics actually show – result in less damage to the property. MSN.com reports that the average monetary damage from tenants without pets is $362. For tenants with pets, the average damage is $323. That’s about 11% less damage from pet owner tenants.
There are plenty of steps the investor can take to protect themselves, including asking for pet deposits in addition to security deposits and putting language in the lease that holds the tenant responsible for any damage caused by the pets. In addition, require the tenant to provide proof of liability insurance, naming the property owner as an additional insured on the policy. Periodic property inspections will help ensure that any problems are detected before things get out hand.
In the end, when it comes to renting your investment property, it may be safe to say that pets do make good neighbors!
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NOTE: We pride ourselves on bringing you the most informative, up-to-date, and accurate information possible about the often-confusing world of real estate investing. Nothing we post however is intended to be taken as legal advice. You should always contact a licensed legal professional for information and advice about your own unique investment scenarios.
Artisan Real Estate Group is one of the top boutique real estate firms in Arizona. We provide an end-to-end suite of services to our investor clients, including a full range of residential and commercial real estate services, investor services, property remodeling, restoration, and rehabilitation, real estate finance consultation, REO and bank-owned property services, trustee sale consultation and bidding representation, and new home builder services. Our international team specializes in helping investors from all over the world with their Arizona real estate transactions. Contact us today to find out how we can help you grow your personal wealth and investment portfolio. Artisan Real Estate Group, http://www.artisanrealestategroup.com/ or call us at (602)644-1280. Email: info@artisanrealestategroup.com
Benefits of Investing in Real Estate Investment Trusts (REITs)
Next in our “Real Estate Investment Trust (REIT)” series…
The investment vehicle known as the Real Estate Investment Trust (REIT) is an excellent option for the real estate investor to explore in today’s volatile economy.
Read additional information about the basic structure of a REIT…
In a REIT, the investor enjoys several distinct benefits over traditional real estate investment vehicles. Whether the REIT is a public or private entity, the investor owns shares of ownership in a pool of investment capital, which provides the ability to diversify the real estate investment. Profits, paid in the form of stock dividends, are not taxed twice as is typically the case with corporate profits. Dividend yields are often higher in a REIT than most stocks and other investment vehicles.
In Arizona, several public REITs exist, as do a variety of private REIT investment groups. These groups may buy property directly or they may loan money to developers, in which case ownership is maintained by the developer. In the latter case, the investment typically earns income in the form of interest paid on the loan. This scenario does not provide the same level of appreciation as a direct property purchase REIT, however. Hybrid REITs also exist, where some funds are invested directly into real estate holdings and others are loaned to developers.
Here’s a small list of REITs in Arizona that include the Arizona Land Income Corp., Starwood Lodging Trust, and Franchise Finance Corp. of America.
One caveat the investor should keep in mind when investing in private REITs include a lack of liquidity. Most private REITs require that the investment remain in the fund for at least two years, however that may be a strong selling point for many investors. The liquid nature of the stock market, for example, exposes the investor to frequent swings – some significant – in the value of the portfolio. The long term investment nature of a private REIT removes a lot of volatility from the investment equation.
Many high net worth investors prefer to invest in private REITs for just this reason. The income supplements their bond investment income, and offers a lower risk and higher return than many other investment options. Program fees in private REITs are sometimes high, and may range from 10% to 15%, however current economic conditions have seen fees fall in an attempt to attract investors.
Either way, the income stream created by REITs make them an excellent option for the real estate investor to explore.
Looking for Arizona property for your REIT? Watch our “income property” page for our hand-picked selections of current homes for sale in the Phoenix Metro area with CAP Rates of 10% and more.
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NOTE: We pride ourselves on bringing you the most informative, up-to-date, and accurate information possible about the often-confusing world of real estate investing. Nothing we post however is intended to be taken as legal advice. You should always contact a licensed legal professional for information and advice about your own unique investment scenarios.
Artisan Real Estate Group is one of the top boutique real estate firms in Arizona. We provide an end-to-end suite of services to our investor clients, including a full range of residential and commercial real estate services, income property location service, investor services, property remodeling, restoration, and rehabilitation, real estate finance consultation, REO and bank-owned property services, trustee sale consultation and bidding representation, and new home builder services. Our international team specializes in helping investors from all over the world with their Arizona real estate transactions. Our goal is to find the best properties with the highest cap rate and ROI for our investor clients. Contact us today to find out how we can help you grow your personal wealth and investment portfolio. Artisan Real Estate Group, http://www.artisanrealestategroup.com/ or call us at (602)644-1280. Email: info@artisanrealestategroup.com
Our Insider’s Guide to Hedging Real Estate Investments
First in our “Hedge Fund Investment” series…
Savvy investors know that some investment vehicles are just better than others when seeking a high return on the investment dollar, even if some risk is involved. Really savvy investors know how to find the great investment opportunity with the significantly minimized risk. Hedging real estate may just be the perfect storm…
With turmoil in the global markets running rampant, many investors have turned back to hedge funds for their investment vehicles. Many more are hedging real estate today. Similar to a REIT, a real estate hedge fund is a pool of private capital, managed by an investment advisor, that engages in various types of real property investments.
Hedge funds historically invest in all kinds of things, including bonds and securities, however the real estate hedge fund has gained popularity because positive returns often continue even when traditional investment markets fall. Hedge funds are private, so their structures are typically less restrictive than many other public investment platforms.
When hedging real estate, the fund buys and holds real property for both income and appreciation. The hedge fund may buy raw land, triple net commercial property, or pools of residential real estate. Some funds buy and hold, however others engage in fix and flip or distressed properties, with the purpose of restoring and selling those for a profit.
In the real estate hedge fund, investors must be accredited, as defined by the Securities Act of 1933. All this means is that the investor must maintain a minimum level of net worth. The investor may be an individual, a trust, a corporation, or other type of acceptable entity.
Hedge funds that engage in securities trading are organized under a strict structure, and those that hedge real estate have similar constraints. The significant benefit is that, as long as the hedge fund is not dealing in securities of any type, the U.S. Investment Company Act of 1940 typically does not apply, resulting in a less restrictive investment structure. As a result, the fund can have an unlimited number of accredited investors.
Hedging real estate is a complex endeavor, however it is an avenue worth exploring for the serious real estate investor.
Next up, the “side pockets” of hedging real estate…
NOTE: We pride ourselves on bringing you the most informative, up-to-date, and accurate information possible about the often-confusing world of real estate investing. Nothing we post however is intended to be taken as legal advice. You should always contact a licensed legal professional for information and advice about your own unique investment scenarios.
Artisan Real Estate Group is one of the top boutique real estate firms in Arizona. We provide an end-to-end suite of services to our investor clients, including a full range of residential and commercial real estate services, income property location service, investor services, property remodeling, restoration, and rehabilitation, real estate finance consultation, REO and bank-owned property services, trustee sale consultation and bidding representation, and new home builder services. Our international team specializes in helping investors from all over the world with their Arizona real estate transactions. Our goal is to find the best properties with the highest cap rate and ROI for our investor clients. Contact us today to find out how we can help you grow your personal wealth and investment portfolio. Artisan Real Estate Group, http://www.artisanrealestategroup.com/ or call us at (602)644-1280. Email: info@artisanrealestategroup.com
REIT Investing in a Volatile Economy
First in our “Real Estate Investment Trust” (REIT) series…
A real estate investment trust, also known as a REIT (pronounced “reet”) is a special tax designation for purchasing income property in the name of a corporation. Think of REITs as the real estate equivalent of what mutual funds are to stocks. REITs are formed for the purpose of eliminating corporate income tax on real estate investment income, but also for a few other reasons that may be attractive to the investor.
First used in the 1800s, the REIT’s original purpose was to help the investor avoid being taxed twice for real estate investment income. Investors pool their funds into the REIT, and the REIT purchases and holds the properties. To qualify as a REIT, the entity must be formed either as a corporation (the typical approach), a trust, or an association. There must be 100 or more investors, the REIT must derive 75% or more of its gross income from real estate investment property income, and 75% of the REIT’s assets must be real estate.
A REIT is run just like any other corporation, with a board of directors, officers as required by the laws of the state in which the REIT is organized, and it may be privately or publicly held. A publicly traded REIT is joined simply by buying stock, and is left just as simply. Private real estate investment trusts, on the other hand, are slightly harder to take part in. Private REITs usually require that the investor buy in with a minimum amount of cash and remain in for a minimum period of time.
Public REITs are simple to buy in or cash out of, however they tend to be less stable, growing or falling in value with market fluctuations. The advantages of private REITs is that, even though they may have more restrictive rules, the investor will enjoy a more stable investment environment that is less influenced by the daily fluctuation of the trading markets.
Like any investment vehicle, a REIT can have both risks and drawbacks. However, approached properly, the REIT offers one of the best real estate investment vehicles available to the investor today.
Next in the series… The Legal Structure of the REIT.
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NOTE: We pride ourselves on bringing you the most informative, up-to-date, and accurate information possible about the often-confusing world of real estate investing. Nothing we post however is intended to be taken as investment, real estate, or legal advice. You should always contact a licensed investment, real estate, or legal professional for information and advice about your own unique investment scenarios.
Artisan Real Estate Group is one of the top boutique real estate firms in Arizona. We provide an end-to-end suite of services to our investor clients, including a full range of residential and commercial real estate services, income property location service, investor services, property remodeling, restoration, and rehabilitation, real estate finance consultation, REO and bank-owned property services, trustee sale consultation and bidding representation, and new home builder services. Our international team specializes in helping investors from all over the world with their Arizona real estate transactions. Our goal is to find the best properties with the highest cap rate and ROI for our investor clients. Contact us today to find out how we can help you grow your personal wealth and investment portfolio. Artisan Real Estate Group, http://www.artisanrealestategroup.com/ or call us at (602)644-1280. Email: info@artisanrealestategroup.com
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