Wondering how to choose the best private real estate investments to participate in, given the multitude of options available? I've been a private real estate investor since 2016 and I will share with you my real estate investment framework.
Since we don't all have the time or money to fly around the country evaluating every promising commercial or residential deal, I've developed a framework for selecting the right private real estate investments.
My goal is to build a $1,000,000 private real estate portfolio by 2025, generating an 8% annual return in a low-risk manner. So far, I have $954,000 invested in private real estate since 2016.
An 8% return is reasonable, given historical annual returns range from 9% to 16%. I'm aiming to be conservative, considering both my wife and I are retired and we have two young children.
I've been investing in real estate since 2003 and believe it is one of the best asset classes for building long-term wealth. The key is to achieve proper risk-adjusted returns without excessive leverage. This approach allows you to weather downturns and ultimately thrive when the market recovers.
Private Real Estate Investment Framework
As someone who has invested $954,000 in private real estate funds and individual deals since 2016, here is how I choose the best private real estate investments.
1) Invest with the largest and strongest private real estate platforms.
There are over 200 private real estate platforms today. Thus, the task of choosing the best real estate crowdsourcing platform can be daunting. As an investor, you want to choose the strongest private real estate platform that lets in only the best operators with the strongest track record. The best real estate platforms also have the most amount of funding with the best team and the most number of deals.
I'm partial to Fundrise platform because it manages over $3.3 billion in real estate investments. The company started in 2012 and focuses on industrial and residential property in the Sunbelt region. Valuations tend to be lower and yields tend to be higher in the Sunbelt region, which is great for diversification for those who live in more expensive parts of the country. ,
2) Invest in real estate in states that are favored by the federal government.
It is highly likely that Trump will be president again after his failed assassination attempt. As a result, consider investing in red states where the Trump administration will likely invest more government money and protect jobs. These two catalysts will help attract more people to the Sunbelt / Heartland region and boost real estate prices. Below is a map of “Trump's America.”
3) Focus on deals in cities and states that have the strongest expected income growth.
Income growth is the strongest variable in determining property price appreciation. Many people think San Francisco is egregiously expensive. However, when you have thousands of 22-year-olds making $140,000 base salaries with an additional $50,000 in equity grants that vest over four years, San Francisco is actually quite reasonable. I will pay particular attention to real estate and income rankings and cross-check the winners with criteria 1 and 2.
Below are the top 20 cities with the fastest income growth. I'm particularly interested in Salt Lake City, Nashville, Raleigh, Columbus, and San Antonio due to growth in the startup, banking, and energy sectors.
The top 20 cities with the fastest income growth include:
#1 Dallas, TX
#2 Jacksonville, FL
#3 Orlando, FL
#4 Seattle, WA (Although a blue city, growth is huge here due to Amazon, Starbucks, Nike, etc, and people fleeing the SF Bay Area)
#5 West Palm Beach, FL
#6 Salt Lake City, UT
#7 Tampa – St. Petersburg, FL
#8 Nashville, TN
#9 Forth Worth, TX
#10 Grand Rapids, MI
#11 Sacramento, CA (Although blue, it should see a spillover effect from expensive SF Bay Area real estate)
#12 Charlotte, NC
#13 Raleigh, NC
#14 San Diego, CA (Blue city and questionable due to lots of condo construction and already expensive prices)
#15 Las Vegas, NV (Red city, but went through massive boom and bust, so I'll be staying away)
#16 Boston, MA (Blue city, but it has good healthcare industry growth)
#17 Columbus, OH
#18 Atlanta, GA
#19 Phoenix, AZ
#20 San Antonio, Texas.
Here are the best cities to live and work.
4) Do extensive bottoms up research to find the best private real estate deals.
Once you've identified a deal that fits all three criteria above, do extensive research by looking at the deal information provided on the respective real estate platforms platforms e.g. pro forma statement of cash flows, exit strategy, background of the operator, etc. In addition, do independent research on the web and speak to people who are more familiar with the location of the investment.
It's important not to take the research provided on each platform at face value. Look at everything you read with a critical eye. The sponsor's goal is to make everything seem as peachy as possible. But as we all know, investments can and will lose money, otherwise we'd all be rich.
Some critical things I look out for include: 1) how much equity the sponsor is putting into the deal (skin in the game), 2) their bankruptcy history if any, 3) the number of deals they've done in the past (minimum 10), 4) how many years they've been around (minimum since 2007 so they've had experience in the past down cycle), and 5) management experience and background.
Not only must you carefully research the deal, you must also carefully research the sponsor bring the deal to market. It is vital you understand where you are in the capital stack if you invest.
5) Invest in private real estate based on your risk tolerance and financial goals
Private real estate is considered an alternative investment that is not as liquid as public equity and fixed income. A common real estate allocation percentage by private wealth managers and large university endowments ranges between 10% and 25% of investable assets. I recommend investing up to 20% of your net worth in alternative investments, which can include private real estate.
You should invest in private real estate based on your long-term financial goals. Generally, the longer you can invest in real estate, the better the return. Owning physical rental properties or investing in rental properties through private real estate funds can build wealth through rent increases and property price appreciation. Try not to sell your rentals unless absolutely necessary.
If you already own physical real estate, you should include real estate funding as part of your overall real estate portfolio. One growing strategy, which I am personally employing, is diversifying my SF Bay Area real estate portfolio by selling one home and reinvesting the proceeds in Fundrise. Fundrise manages investments in cities like Dallas, Austin, Seattle, Las Vegas, Hayward, Miami, and Virginia.
Diversifying my real estate holdings helps me sleep better at night, given my heavy investment in San Francisco. At least there is an artificial intelligence boom driving property prices higher for now.
Some Attractive Private Real Estate Investment Cities With High Cap Rates
I hope this article provides you with a rational framework for choosing your next private real estate investment. Make sure you follow a disciplined approach to building your real estate crowdsourcing portfolio over time.
Of course, there are no guaranteed returns when it comes to risk assets. However, by diversifying your private real estate investments across various states or through different funds, you'll increase your chances of achieving a positive long-term return.
For those with more interest and time, I'm confident that if you follow my five main points, you'll do better than those who do not. The key to real estate investing is a strong local economy with economic catalysts driving job and wage growth. If job and wage growth are strong, real estate prices will likely follow.
Consider Fundrise As Your Platform To Invest In Private Real Estate
I've personally invested over $280,000 in Fundrise because I believe in their real estate investing expertise. They've been around since 2012, and I've met and spoken with Ben Miller, the CEO and co-founder of Fundrise, multiple times about his real estate outlook over the years.
Fundrise is a vertically integrated private real estate company that researches, invests in, and manages its own deals. They offer multiple funds to choose from based on your real estate goals. Fundrise is also a long-time sponsor of Financial Samurai, given our aligned real estate philosophies.
You can listen to one of the many podcasts I've done with Ben Miller by clicking the player below.
If you want to dollar-cost-average into a Fundrise fund, you can do so by clicking here. The investment minimum is $10.