Helping Clients Invest in Real Estate

Helping Clients Invest in Real Estate

David Gottlieb says retail buyers can compete with corporate real estate investors.

Reviewed by: Staff
Edited by: Ron Day

David GottliebAgainst the backdrop of recent reports that lawmakers across the country might be cracking down on corporate buyers of residential real estate, talked with real estate expert David Gottlieb, a wealth manager at New York-based Savvy Advisors.

Jeff Benjamin: Lawmakers are focusing on the impact of private equity investors driving up the cost of homeownership. How big an issue is this for consumers?

David Gottlieb: For the private equity investment community diving into single family homes, the fallout is certainly an issue. There are many reasons why single-family portfolios have become attractive to institutions. However, this additional demand has driven prices higher than they would have if institutions were not in the market.

Though they only hold a 3% to 5% grip on the single-family home market, they bid on so many more properties which ends up driving up the price even if they are not the ultimate buyers. 

Lawmakers see this as wealthy investors creating a dynamic of driving up prices to provoke families to rent from their portfolios rather than buy their own home. While some areas of the country are more affected than others, it is a concern that has led the U.S. congress to consider cracking down on private equity participation in this arena in an effort to make homes more affordable for the average American family. 

JB: Is there a way for consumers to compete with the large corporate investors?

DG: In some ways, the answer is no. Corporate investors with all cash offers provide outsized competition for home buying on top of all the other economic conditions making for a difficult home buying environment. However, consumers will have an advantage if renovations or repairs are needed. This does not suggest consumers are only left to purchase renovation projects. However, institutions are not in the business of buying homes to fix up or renovate. 

Additionally, corporations have specific price targets. While they may creep into higher-priced markets, homes above a mean price point in a given location are not an ideal institutional target. For homebuyers looking for premium homes, the market is not as affected by institutional competition.

Finally, gated communities and other developments often have stronger control over who buys in their jurisdiction, making institutional buyers non-factors in these cases.

JB: On the flip side, does securitizing these residential real estate assets into portfolios packaged as ETFs represent opportunities for financial advisors and retail investors to benefit along with large corporate investors?

DG: Single-family homes investment demand is trending upward for financial advisors and retail investors. Whether these are worthwhile opportunities or not remains to be seen, particularly as it relates to legislative pressures on the asset sector, and there are promising factors at play. Tenants of these properties tend to stay longer than the renters of multifamily structures. 

Additionally, it opens investors to a new segment of renters that in some cases hold far more insurance and expense-related responsibility over the home. This potentially makes for higher margins, lower liability, and with a wider exit strategy as retail consumers can pose another bidding party when liquidation is desired or otherwise required.

JB: Are you allocating client investments into residential real estate and mortgage ETFs in this market?

Absolutely. From the mortgage side, the interest rate and lending term environment is very much in favor of the lender. Loan to value ratios lead to more protection in the event of a default. And debt covenants are more demanding, which makes for higher quality conditions when loans are issued. Lastly and most obviously, the yields on these mortgages are higher than recent history, which increases the investment’s overall return.

Residential real estate is attractive because of the consumer environment. Not as many families can afford homes, resulting in more rental demand. Even in different economic circumstances, residential real estate is an attractive investment choice due to higher inflation potential. A myriad of hurdles exist across all real estate sectors, with higher insurance premiums, real estate tax, interest rates, and labor costs, however rent increases are often offsetting some of that risk. 

JB: What about the commercial real estate market, which is more heavily represented in ETFs, are you seeing opportunities there?

DG: Non-residential real estate investments can also be an attractive option in this market.

While office space, traditional retail, and other commercial real estate struggles mightily, industrial, biomedical office buildings and consumer staple retail properties all provide varying levels of upside potential. These tend to have stable rent rates for multiple years, and typically rent to one tenant per property. Both of these risks tend to be offset by the credit rating of the guaranteeing party as well as initial and projected future rental prices.

Advisor Views is a bi-weekly Q&A-style series that features voices from across the financial planning industry sharing insights on investment strategy and portfolio management as it relates to the current economic environment.

The format enables advisors to respond in their own words to specific questions designed to provide readers with practical tools and tactics that can be applied to managing client portfolios.