World’s best asset class, do you have enough in your portfolio?

Traditional investment advice is to hold a portfolio of liquid stocks and bonds. If you contribute to this portfolio regularly, re-invest dividends and hold for the long term you will likely be better off than if you just held cash but there are better assets to allocate your hard earned capital to. Including higher yielding, ‘alternative’ asset classes will make a significant difference to your net worth over time. 

If you don’t have investment real estate as part of your overall portfolio it is likely because it wasn’t as easy to acquire real estate exposure as it was to acquire more stock, there were high barriers to entry and it was viewed as illiquid. With stocks forecast to yield 4% a year for the next decade according to John C Bogle, founder of Vanguard group you need to find ways to make your money work harder for you to avoid having to spend your retirement continuing to work hard for your money. 

Real estate is, in my opinion, the most advantaged asset class on earth for the reasons below and you can now more readily access this asset class, passively via real estate syndication. But don’t take my word for it, the Yale University endowment has become the standard for a high performing endowment by allocating a significant proportion of its portfolio to alternative assets, including real estate which allowed it to earn a 12.3% return in 2018. 

Here is why real estate is such a great investment 

  • Tax Advantages – the biggest advantage to investing in real estate in the US are the significant tax advantages. You can indefinitely defer paying tax on any realized gains by doing a 1031 exchange, you can withdraw cash tax free by refinancing, you can depreciate the value of the property over time to offset any tax on income generated and if you do sell you can take advantage of long-term capital gains rates. 
  • Leverage – leverage is readily accessible with real estate since it is a tangible, insurable and cash flowing asset. By using leverage responsibly, we can dramatically increase our cash on cash returns. 
  • Cash flow – real estate has utility in that it provides shelter and this is something that people are willing to pay for. With investment real estate we only buy deals where the tenants payments cover our financing costs, our principle payments and excess cashflow each month. 
  • Appreciation – over time the price of real estate increases, broadly in line with inflation which means that even if we do nothing the value of our asset will increase over time. With multifamily apartments we can force this equity appreciation by reducing costs, increasing income and getting a higher valuation based on the increased Net Operating Income (NOI) 
  • Principle Pay down – Since we typically leverage real estate purchases we must pay that debt back each month. This continuous pay down can result in significant equity buildup over time 
  • Liquidity Options – you don’t need to sell your real estate in order to realize cash gains, you could do a cash out refinance or you could withdraw cash via a home equity line of credit. The biggest advantage here is that the cash that you withdraw is tax free. 
  • Competitive Risk Adjusted Returns – according to Investopedia, commercial real estate has outperformed the S&P, delivering a 9.5% return over the last 20 years. 
  • Inflation Hedge – historically the value of real estate has risen in line with inflation which makes it a great inflation hedge. This benefit can be compounded if you secure long term, fixed rate financing which depreciates in value as inflation rises 
  • Control – unlike a stock we can have direct control of our real estate asset. We can invest in it to command better rents, get better at selecting tenants, live in it ourselves which means that we get to make more of the decisions which impact our overall return 
  • Tangible, Insurable Value – Real estate is a physical thing that we can see and touch, it has intrinsic value. As a result it is insurable which means that you never need to be concerned about the value of your asset going to zero. This is not the case with stocks, just look at what happened to Lehman Brothers. 
  • Diversification – real estate is uncorrelated to stocks and bonds which means that it won’t necessarily go down in value when stocks do. Diversification is a key component of a balanced portfolio in order to reduce risk 

If you are an accredited investor and you want to take advantage of the many advantages of real estate you can register for our future deals here 

The Robots Are Coming

Two Oxford economists published a paper in 2013 where they estimated that 47% of American jobs are at a ‘high risk’ of being automated within the next 20 years. If you think that this will only impact blue collar industries then you should check out how a team of 600 highly educated Sales Traders at Goldman Sachs who earned an average of $500,000 per year were whittled down to a team of just 2 people by the application of digitization, automation, artificial Intelligence and machine learning.

What are these technologies anyway? Let’s take a look at what these technologies are, how they can be applied to real estate and what the benefit to real estate investors will be.

  • Digitization: This is the storage of data in a digital form and is a baseline requirement for all of the technologies that follow. One example would be moving your contacts into a Customer relationship Management (CRM) tool.
  • Automation: Sometimes called Robotic Process Automation, this is the automation of repetitive and predictable tasks. An example of Automation would be automating the workflow of receiving an email from a potential investor, logging their contact details into a CRM and instructing a automated marketing platform to send them content.
  • Artificial Intelligence: Where Automation technology allows us to automate predictable tasks e.g. if X, then Y, AI introduces the concept of human like thinking. AI looks for patterns and selects the most appropriate response. Using AI we could decide which content is best to send to the investor based on some of their attributes e.g. age, gender, area of interest. The CEO of Google, Sundar Pichai, recently stated that AI is “one of the most important things that humanity is working on”
  • Machine Learning: Here we introduce a feedback loop into the AI technology so that the AI receives feedback on the response it provides and incorporates that into future selections. It’s like a human making better decisions as a result of being more experienced. Machine learning could, for example track, the number of opens on the content sent in the example above and potentially send different content next time to get better results.

OK, so it is interesting to learn a little about the technologies that will shape our future but so what? Well, I am all about what outcomes technology can deliver for my business so let’s take a look at how I am looking for better outcomes by leveraging some of these technologies.

I launched Phoenix Equity Group in 2018 to focus on syndicating multifamily apartment buildings in markets that are best positioned for sustained growth based on economic factors. It is very important to me that my business is data driven, leverages advanced analytics and is as operationally efficient as possible. Ultimately, I see delivering the best risk adjusted returns for investors as the best way to grow my business and I think I can best achieve this by leveraging digitization, automation, AI and Machine Learning. Here’s how we will leverage these technologies

Investor Engagement and Capital Raising

Syndicating multifamily real estate means raising capital from accredited, private investors to fund the equity portion of a deal. The equity portion is required to cover the 25% that the bank typically won’t finance, the cost of planned improvements that will increase the value of the property and also the upfront cash required to assemble and close the deal. This is typically in the range of 30%-35% of the total value of the deal. By leveraging a CRM we can ensure that potential investors data is digitized and by using automation we can ensure that potential investors are engaged on a regular basis and that the lifecycle of getting committed capital is as automated as possible

Market Selection

Market selection is a data and analytics intensive task but luckily many of the data attributes which impact the potential of a market are programmatically available. One example of this is US Census bureau on economic indicators like population and jobs growth. By examining this economic data over time, we can leverage AI and Machine Learning to identify which specific indicators most impact rental rates and vacancy and by how much. By understanding this we will be better positioned to very quickly identify markets positioned for future growth. Market selection does not guarantee success but it is a strong foundation. We believe that people who have now selected strong underlying markets will be in trouble when the market cycle turns

Sourcing Deals

At Phoenix Equity Group we are focused on identifying target deals whether or not they are listed for sale. We have leveraged automation software to build a database of properties in our target markets and we focus specifically on the data that identifies the property as having value add potential. This makes us more efficient since we don’t need to wait for properties to be listed by brokers and we can very quickly filter out properties that don’t meet our criteria. This reduces the number of deals that we ultimately underwrite.

Underwriting

Underwriting is the process of gathering the data necessary to come up with an objective valuation range for a property. Two key inputs into this process are the financial statements and the rent roll which at this case are more like a best-case scenario but we will get to the actual data in the due diligence phase. The challenge here is that this data is delivered in whatever format the seller has it in. It could be PDF’s, excel sheets or word documents. To do our analysis we need to get this data into the format required by our financial models. We use elements of automation, AI and ML to automate this process. We can add further value by starting to identify which elements of the property will most enable us to add value.

Due Diligence

Due diligence is a quantitative and qualitative review of the tangible and intangible aspects of a property. Like underwriting, we need to gather multiple pieces of data which may be in a variety of formats. We need to transform that data into our formats in order to build our own valuation models. We also run through a repeatable checklist of steps which lends itself to some degree of automation. The human element provides a tremendous amount of value at this point due to the qualitative nature of due diligence but technology can bring efficiency and consistency.

Asset Management

We buy assets that are underperforming relative to the market, put simply, they have lower occupancy and lower rents than comparable properties nearby. We create equity by increasing occupancy and increasing rents. In order to improve occupancy and increase rents we need to provide additional value to prospective tenants. There are many ways to provide this value with one example being renovating and updating the unit. Using data and analytics (AI) can allow us to make better decisions as to where to spend out improvement $ in order to get the best return for any given market. With enough data built up over a history of projects we will be better positioned to automate some of the decisions as to what our value-add business plan should include.

As you can see, emerging technologies will provide us with significant opportunities to run more efficient businesses, achieve scale more quickly and to develop a more consistent methodology for making decisions. Technology will never replace the human element but it will free us up to focus more on where we add the most value and if used correctly to run more profitable, predictable businesses. Have no fear, the robots are coming to help!

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