One thing that Andrew Lanoie, Co-Founder of Four Peaks Capital Partners, understands is the investing habits of high net worth individuals (HNWI). Their mindset and approach are different from the masses, and they end up rising above the herd. Unfortunately, those same innovators will take a very conventional approach to investing. They will allocate heavily in risky areas, pay premium fees to have hedge fund managers gamble for them, or invest in costly public real estate funds (REITs). They end up suffering from high fees, volatility, lack of privacy, and more.
There is an alternative: Private real estate funds. Investing in these funds is a smart, against the grain play that most investors don’t even know about. Here’s why they are so effective.
Fees: The mainstream investment industry is built on fees. They are everywhere, and they can massively reduce your wealth building power. There is a reason a wealth manager will generally not suggest private real estate: because it will cut into his or her profits. Financial managers make money every time they move your money around. That is why they prefer public funds. They can rebalance your portfolio through the market and make a killing every time they do it. This effect even more prevalent in the case of affluent investors.
Most financial planners work on commission, so the more money they are moving around, the more money they get to collect. Whether you are investing in stocks through a hedge fund, or in real estate via REITs, management is taking their cut. For hedge funds that percentage can be up to 5%. For REITs, that number can be 10-15%. Private real estate investment usually has a much more investor-friendly fee structure.
Long-Term Outlook: REITs must compete heavily in the open market. The result of this is often choosing the short term over the long term. A common case of this type of thinking is in the paying out of dividends. REITs will make try to make themselves more appealing to investors by offering a hefty dividend. Unfortunately, this usually hampers growth in the long term and ends up being worse for the investor. Private funds have the freedom to take a smart, long-term approach.
Better Communication: When investing in a large, public fund, you are just one face in a massive crowd of investors. That means little or no communication from the people that are in charge of your money. With private funds, you will have better access to the managers and feel like a valued investor instead of a number.
Volatility: It is well-known that the stock market is very volatile. What is less known is that REITs suffer from the same swings. REITs have a high correlation to the stock market because they are also publicly traded assets. One of the primary reasons to get into real estate is to make your investment safer. With REITs, this is not the case. When the market experiences losses, so will you. Alternatively, private funds are not on the open marketing. Because of this, they experience much more stability when the market wavers.
Privacy: The rise in technology has led to a fall in confidentiality. Between public databases, social media companies, and search engines, your data is out there, and it is not very hard to get it. Data sharing does not end with simple internet browsing preferences – there is a whole industry surrounding asset allocation. With private investment, you can keep your investment information safely out of the hands of vultures.
Diversification: The investment portfolios that weather the storm of market downturns are the ones that are diversified. Over-investing in stocks is one of the biggest mistakes an investor can make. Their money can disappear overnight, leaving them unprepared for the future. Investment in real estate helps diversify and stabilize an investment portfolio, and private funds are the best way to do it.
This is true in business as well as investing. An intelligent approach that you’re not going to hear about from financial managers or typical investors is private real estate investment funds.
Instead, this strategy is the secret weapon employed by the smartest affluent investors in the world. With lower fees, more privacy, less volatility, and all of its other benefits, private investment is well worth your consideration.