Even Wall Street Is Moving To Real Estate
The wealthy have been leveraging real estate for years for the many financial and non-financial benefits it offers a portfolio. Not to be left out, institutional investors have recently made a big move into the space to take advantage of these same benefits sophisticated investors have been leaning on for decades.
Everyone has seen the results of the move by institutional investors into the rental real estate space from the surge in real estate prices and rental rates, but they probably didn’t realize the source. In fact, according to recent data, residential real estate acquired by companies or institutions soared to 90,215 homes in the third quarter of 2021, as investors, both large and small, accounted for 18% of single-family home sales. That’s up 80.2% from the year prior, according to the online real estate firm Redfin.
Institutions have been mainly focused on single-family residential real estate recently. Until lately, big institutional investors largely ignored the single-family rental market, which preferred scalable multifamily properties. But since 2019, that has changed significantly. Big names like J.P. Morgan Asset Management, Blackstone, and Goldman Sachs Asset Management have all gotten into the game by bankrolling more than two dozen single-family home rental companies that are snapping up existing properties and building new ones.
So why real estate, and why now?
The answer can be summed up in two words COVID and inflation. Residential real estate was spared the impact of pandemic-related lockdowns on offices and shops and has proven to be a relatively high-yielding hedge against inflation as rental rates across the board have been able to keep pace or even exceed inflation.
Once focused on scalable multifamily real estate, institutional investors have turned their sites on single-family residential due largely to technology. Advances in technology in the real estate space enable institutions to scale and manage their portfolios more efficiently, enhancing the ability to analyze the market, speed up research, streamline due diligence and make smart decisions more quickly, and streamline costs associated with property management.
Sophisticated investors have always been attracted to rental real estate for its multifaceted benefits. Not only does rental real estate offer inflation-insulated cash flow but also appreciation, diversification, and tax benefits. These are the reasons sophisticated investors gravitate towards rental real estate.
Here is a summary of the benefits of rental residential real estate:
Proven And Reliable.
Billionaire Andrew Carnegie famously said that 90% of millionaires got their wealth by investing in real estate. Rental real estate has proven to be one of the most reliable wealth-building assets many millionaires have relied on to build their fortunes – often from scratch.
High Risk-Adjusted Returns.
By scaling across multiple properties, retinal real estate investors can diversify returns by insulating cash flow from vacancies and downturns where a portfolio of properties can compensate for one or two faltering properties. Owning multiple properties is conducive to economies of scale for reducing costs per-unit basis. On one side, multiple sources of recession, inflation-insulated income, and expense-reducing economies of scale result in higher risk-adjusted returns.
For sophisticated investors, it doesn’t matter where an extra dollar added to the bottom line comes from – whether from an additional dollar in income or a reduction of a dollar in expenses. That’s why smart investors covet tax savings.
Rental real estate investments – in particular passive investments structured as partnerships – offer many tax benefits, including business deductions, regular depreciation, bonus depreciation, long-term capital gains treatment, avoidance of self-employment taxes like FICA, and tax deferral through 1031 exchanges.
Leverage And Scaling.
Bank lending allows investors to leverage their capital across multiple properties instead of a single property. Instead of sinking $1,000,000 into a single property, sophisticated investors will use the $1,000,000 as down payments on loans to acquire 4-5 properties instead of a single one – leverage results in supersized returns – even when accounting for debt servicing.
Insulated From The Madness.
Ironically, Wall Street players are turning to real estate to insulate themselves from the madness of their own markets. The illiquidity of real estate insulates it from the madness of the Wall Street crowds that jump in and out of liquid stock and debt positions at will and create volatile market waves.
It’s no surprise that Wall Street is turning to real estate in droves. The inflation-insulated returns and reliable appreciation are a sure way to protect portfolios in these volatile and uncertain times.
Michael Foley, president and CEO of Humabilt Capital, oversees the entitlement process, funding, and operations for Humabuilt Capital. Mr. Foley has been a full-time real estate investor since 1995 during which time he has developed hundreds of single-family homes, townhomes, condominiums, and apartments. Mr. Foley started his investment ventures in Long Beach, California, and has expanded to Apex and Durham North Carolina. Mr. Foley is a graduate of the University of California at San Diego.