Property and Housing Remain Good Options in Uncertain Times (Opinion)

Andrew Carnegie once said, “Ninety percent of all millionaires become so through owning real estate.”

If one of the richest men in history believed in real estate investment as a venue for accumulating wealth, maybe you should consider his words when determining where to invest your hard-earned dollars.

There are five investment-grade classes of real estate — retail, office, industrial, hospitality and multifamily. Multifamily, or apartments, historically have been one of the least sexy of the options for investors because they house people. That means potentially becoming involved in the life drama of your residents. Of course, each of the five classes has its merits as well as its risks, but as of late, apartments have been one of the stronger performing of the five options.

There are three primary ways to take advantage of some of the benefits of investing in larger apartment communities.

1. Invest through a publicly traded Real Estate Investment Trust. Some examples you can find on the New York Stock Exchange are UDR Inc., Equity Residential and Mid-America Apartment Communities Inc., which owns several properties in the Little Rock market.

Some of the primary advantages with this option are a professional management team, liquidity with regards to being able to quickly cash out, and the level of reporting transparency that comes with adhering to public company regulations.

2. Make a direct investment. Buy an entire property yourself. Possibly the most direct route to a desirable return on investment, this option should come with a warning label. If you are not comfortable with unclogging other peoples’ toilets, or don’t like hitting people up for rent money days before Christmas, this may not be your ideal path.

Even if you outsource the management to a third party, you more than likely will have some hands-on involvement.

It can be a good opportunity for the right person. Just make sure you have a serious conversation with yourself before embarking on such a journey. Also, if you and/or your hired management company can’t prove a strong record of owning and or managing similar types of properties in the past, it may hurt your ability to obtain a mortgage loan, no matter how much of a hot deal you get.

3. Invest with a private owner/operator who can prove good education and credentials, as well as a strong track record in the asset class. The operator should have the appropriate relationships and know-how to source and analyze deals, finance them at decent terms, effectively operate the properties with a focus on net operating income growth as well as asset preservation, and know when and how to sell the property so that you get a big fat check over the term of the investment and one at the end of the investment.

The challenges here are comparable to an apartment REIT in that there is less liquidity with regards to your investment. While there should be some reporting transparency, you likely won’t realize as much as with a public company.

Compared to a direct investment in a property, you as the investor have less control over the operations and investment decisions with regards to the investment, and generally must leave that up to the professional owner/operators with whom you opt to invest.

Some of the advantages to making an investment with a private owner/operator may include a pro-rata portion of tax benefits that pass on to you, and the financial returns are often notably higher than that of a REIT.

In times of great uncertainty, property and housing are always good investments. While you may never have a hall named after you as Carnegie did, some dirty old apartments just might allow you to both generate a decent profit and leave something memorable for the future.

Joel Sanders is a CCIM and president and CEO of Trinco Apartment Homes, an apartment investment and operating company based in Fayetteville. He can be reached at [email protected].