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BRIAN ESTES — Real estate investment strategies for high net-worth individuals

Most of my day is filled with conversations about commercial and investment real estate and the majority of the time I am discussing investment strategies with high net-worth individuals. Our discussions are mainly about which markets to invest in and what property type offers the best returns.  However, toward the end of the conversation I always try to steer the subject matter to investment strategy.  To the majority of investors, especially passive investors, investment strategy is something that is decided after putting a property under contract.  Examples of investment strategies could be to buy for long term cash flow; purchase underperforming properties; purchase large tracts of land and subdivide.  There is a wide variety of investment strategies that are not property type specific, but how a property is purchased and the type of exit strategy will be implemented.  Not all investment strategies are for long-term “cash flow” and many passive investors have found several other strategies to more lucrative.  I guess now is the best time to mention that employing different kinds of investment strategies can increase risk in investment real estate.  Truly understanding the risk/reward scenario is imperative.  During my career I have found three (3) primary types of investment strategies most “passive” high net-worth individuals search for when making commercial or investment real estate investments.  Again, these are not the only three (3), but they seem to be the most common. 

Buy properties in high growth markets.  There’s no doubt that most passive investors prefer to be in growing areas with newer construction.  It’s not only a “strategy”, but obviously a herd mentality.  Residents, investors, tenants and others like new things and no doubt there is a buzz when a market is seeing new housing and commercial buildings being built.  The strategy is to purchase the property and let market appreciation grow rents and value.  Many investors see this as an opportunity to purchase a property with a higher demand and less property related issues since the properties are newer.  Again, most of these high netters are passive investors and not in the property management business so it only makes sense for them to be more comfortable with fewer problems.  In addition, these type investments tend to be more predictable & safe.  The downside to these types of properties is that they are highly competitive and typically bring lower returns than other strategies.  However, if the market is growing, the investor should enjoy increasing rents and ultimately a higher valuation. 

Land banking. Yeah…I know I said these investment strategies were not property type specific; however, there is just something tempting to high netters about buying land.  This strategy is similar to purchasing in a high growth area, Land Banking assumes appreciation over time as growth and developments occur.  Typically, an investor has a bulk of cash to park and doesn’t want the day to day management headaches of other investments so they will purchase a tract of land on the outside of a growing area.  In addition, there would possibly be some type of zoning change from agricultural to residential or residential to commercial. Some investors get into this strategy through inheritance of family land and others have a real sense of which direction a community is shifting.  The appeal of land banking is that it involves very little management and you can possibly enjoy the land while you wait on an exit strategy.  The downside of this type of investment strategy is that timing of an exit or disposition is not predictable.  However, many investors I have worked with that have utilized this strategy have made above-average returns with what they feel was little risk and very little work.

Buy & revitalize underperforming properties. This is the most commonly requested investment strategy of all investors, not just high netters.  This is also the most common investment strategy for novice investors who are purchasing single-family homes to syndicators who are purchasing large apartment complexes.  In reality, this is a very good strategy and does reduce the risk of investing by purchasing at a discount and handling the serious issues of the property on the front end.  Some HNWI investors will use this strategy for long term cash flow and appreciation and others will “add value” and then sell the property for a profit over a 2 to 3 year period.  The downside to this strategy is obviously this is not “passive” and requires a lot of market knowledge and execution of the strategy once the property is acquired.  Most passive high net investors will joint venture with a more active developer or property management companies who are familiar with the property type.  This investment strategy typically yields the highest returns; however, as previously mentioned, involves more risk and certainly more work as the strategy requires execution after purchase.    

Overall, there are a myriad of additional investment strategies used by high net-worth individuals and other investors in commercial & investment real estate.  Which strategies investors should utilize should depend on investment experience, cash position, and relationships within the industry.  In addition, certain strategies work better for specific property types and markets.  It’s always best to consult with a real estate professional who understands the investment markets before implementing any of these strategies.

Brian E. Estes is president and investment advisor with the Estes Group and can be reached at brian@estesgroup.net.

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