Direct ownership in an alternative asset class
Our philosophy for creating wealth provides for not only diversified tax strategy and investment funds, but also diversity in asset class. Real estate, as an alternative asset class, provides for investments with low correlation to equity markets. But like everything else Prevail does, we’ve taken a different approach than traditional wealth management companies.
The traditional model is to have generic real estate funds (REITS, mutual funds, etc.) that are utilized based on risk tolerance to balance a portfolio. However, as recent history has shown, real estate markets can also have significant swings that present opportunities for significant growth. To that end, we identify off-market opportunities in specific real estate sectors and conduct in-depth analysis, all to provide our clients with specific property investment opportunities.
Like our approach to other investments, real estate opportunities are utilized as a part of client-specific strategic plans. While every property is different and performs with particularity in its given circumstance, real estate as an asset class generates returns through two means: income or cash flow and the sale value (generally calculated with a cap rate). Our analysis also considers leverage on a property and market conditions to provide a clear understanding of the opportunity prior to investment.
Our philosophy on real estate is to identify key sectors and key partners that allow us to take advantage of any given market cycle, create growth opportunities for our clients.
Property Income: is derived by lease payments, and generally speaking, inflation will typically put upward pressure on rent rates. If investors/owners can increase the lease rates, it is a natural hedge against inflation. But it doesn’t impact every sub-sector the same. Properties in industrial and office sectors typically are 4+ years in length, with anchor tenants often having a ten-year or longer contract. In those cases, the cash generated is basically fixed, and real returns would be reduced by inflation. Contrast that to multi-family or hospitality where lease terms are measured in one night or up to 1 year for an apartment, and adjustable rents can help hedge against inflation.
Property Value: is most often calculated based on net operating income and a cap rate. The higher the cap rate, the less valuable the property. The lower the cap rate, the more valuable. Oversimplifying to illustrate, historically, cap rates move up as interest rates rise, and interest rates generally move up to counteract inflation. Yet, it’s again not that simple. There is a counterbalancing force. As prices for materials and labor move up with inflation, new construction is more expensive, leading to higher valuations for both new construction (likely in lower supply) as well as existing properties. We see that happening today with big rises in single-family home prices.
Interest rates for borrowing: inflation devalues currency which causes lenders to charge higher interest rates to make a profit. Like increases in raw materials, that causes developers to be more selective on new construction, which in turn limits supply and consequently increases values in existing properties.
Market Demand: if income, value, and interest rates aren’t complicated enough, the demand for real estate is another variable that impacts real estate performance. Historically, investors demand for hard assets increases during inflationary periods, including real estate, precious metals, and oil which then tends to move values up.
Does real estate provide a hedge against inflation?
Real estate can be an effective hedge against inflation generally. The appreciation in value (not the income production) can work to offset inflation.
We Have Some Answers
Direct investments into private real estate, while relatively illiquid, can create distinct opportunities for investors relative to publicly traded investments. In fact, it has historically performed in the top quartile of all asset classes and on a risk adjusted basis is the number #1 performing asset class in the last 10 years.
Historically, alternative asset classes like real estate, greatly enhance your overall portfolio performance Real estate, are unique assets that behave very differently than stocks, bonds or cash. They tend to be less liquid than traditional investments, have a low correlation to equities and can serve an important diversification function in a portfolio, thus enhancing overall returns.
Real estate as an asset class can be an important part of diversifying your portfolio. Private real estate investments are typically non-correlated to publicly traded securities, providing a very effective way to diversify. Off market, direct investments allow us to have direct investments into specific properties rather than putting investments into a blind pool. This type of an investment provides diversification vs. publicly traded investments that are impacted by macro forces, and can provide distinct tax advantages to investors if structured properly.
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The information is not an offering to sell a real estate investment. The content is informative in nature and specifics are only available upon request. Investing in real estate involves risk, many times is illiquid, and use should consult your financial professionals before making any investment of this nature.
An offer or solicitation to acquire interests in the investment may only be made by our Private Placement Memorandum (“Memorandum”) in accordance with the terms of all applicable security laws. All information contained herein is subject to and qualified by the contents of the Memorandum. Participation in any securities offering is limited to Accredited investors. Please call to obtain a copy. You must read it before investing. Past performance is no guarantee of future results.