By Bob Carter, BA, GBA, CIM
Has all the continued negative press taken the lustre from investors’ love affair with owning investment real estate? For many long term investors, the answer is no. The question has evolved beyond, ‘how can I make money in real estate?’ to: ‘how do I choose the right vehicle on which to build my real estate empire?’
Investors must first decide whether they want to be active investors or passive. Will they buy and sell to make quick profits, or choose to buy and hold for the long haul? There is however, a real estate investment strategy that focuses on an intermediate term with a specific exit strategy which brings a completely unique perspective to the asset class.
Real estate investors look at properties in terms of positive cash flow, mortgage pay-down and market appreciation. Real estate developers look at housing as products to be designed, manufactured and sold at a handsome profit.
Real estate investment limited partnerships have become a strong alternative investment for Canadian exempt and accredited investors. Some of these provide access to pools of real estate, similar to REITs to be held longer-term while others are project oriented in nature and represent an opportunity to help builders purchase required land or provide other financing.
Project oriented opportunities offer the investor the chance to enjoy their share of the projected future profitability of the completed project, while limiting their downside risk to the amount of capital they invested. The best quality offerings only deal with name-brand builders and fund projects after all zoning risks have been handled making the development ready for marketing to the public.
Investor access to these kinds of investments vary by province, it is best to speak to a registrant to find out if you are able to invest. Currently in Ontario, the most restrictive province, only those who meet certain income or net worth criteria as accredited investors (including current or formerly licensed stock brokers) can invest alongside these leading property developers and share in the project’s profitability.
One well-known firm has completed over fifty projects representing some of the best-known communities and buildings in the Greater Toronto Area. Their deals range in duration from between two to ten years, depending on the size and complexity of the project. Typical target returns are over twenty percent, and to protect downside risk, a fundamental tenant of their strategy is to acquire their developable land on a private sale basis, at conservative market valuations and with use of very little or no leverage at all.
Investors are indirect, beneficial owners of the property being developed through investment in either a limited partnership or mutual fund trust. It is important to distinguish that these are equity investments and not loans or syndicated mortgages, which make up a different asset class. Investors do not receive regular interest payments, but rather as owners of the project’s equity they realize their return upon successful completion of the development. Depending on whether there are single or multiple phases, investors can expect to receive a return of their initial capital and their profit distributions as homeowners take possession of their new homes and units over the course of the development.
These investments may be held as non-registered or in fully registered accounts such as RRSPs, RRIFs and inside TFSAs. Minimum investment commitments are required for qualified investors. Projects are often over-subscribed and investors must be prepared to move fast and have their allotments scaled back, similar to initial public stock offerings for the most popular new issues.
While past performance is certainly no guarantee of future results, the results for these types of investments have been strong by the best in class Issuers, thanks to a disciplined approach to underwriting and risk management. Investors must seek advice and read offering memoranda to be sure they understand tax consequences and the risk versus reward potential. Investors must also be prepared to accept the lack of liquidity in these kinds of projects and be prepared to commit for the entire term of the project.
Thinking of real estate as a product to be manufactured and sold is a new way of considering your investment options and what have been to date, strong ‘manufactured’ returns.
Bob Carter BA, GBA, CIM has over 30 years of sales, management and business ownership experience. Bob is currently the Director of Sales with ClaimSecure, one of Canada's leading group benefits claims adjudication companies. Prior to that, Bob spent 10 successful years as a licensed stockbroker, financial planner and life insurance rep with a major Canadian securities firm. Bob holds several professional designations including, Group Benefits Associate (GBA), and Certified Investment Manager (CIM). Bob is a recognized speaker, published author and contributing editor to Canadian MoneySaver Magazine and Benefits Canada online and can be contacted at email@example.com.