Private real estate: How retail investors can reap the benefits

July 2, 2019 | Real Estate

Diversify into various asset classes, pick private real estate and use your small size to advantage.

A cornerstone of investment theory is to improve the return on a portfolio by allocating it over a number of asset classes with varied correlations.

Institutions such as Harvard and Yale, which run massive endowments, have used this principle successfully over the long term to better their returns at lower volatility.

Everyday investors, though not having similar financial muscle, can adopt the same asset allocation practices. At the same time, they can use their smaller size to get deals that are out of reach of the institutional behemoths.

The three steps

Retail investors can follow a three-pronged strategy to boost their returns.

First, look at diversifying away from the traditional, public markets such as listed stocks and bonds. Instead, look at the wealth of opportunities available in alternative investments, particularly private real estate.

Second, recognize that institutional money may not always be the smart money. That’s because their sheer size restricts them to the upper echelons of real estate such as select or CBD areas in top flight cities. And because of the amount of money chasing these prime picks, deals are expensive hence returns are lower. The smaller guy could look at emerging cities with better fundamentals that are not yet on the radar for the behemoths.

Third, look to invest in smaller private real estate funds that are able to deploy capital quicker than the institutions. Research shows that assets under $10 million generated an IRR that was 8.76% higher than the larger assets.

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