The Benefit of Investing In Multiple Asset Classes
Commercial real estate is a cyclical investment vehicle fueled by supply and demand in various forms. The supply of ready capital, tenant demand, and investor psychology are some of the drivers of these cycles. Within any period in a cycle, certain asset classes are priced at a premium compared to their counterparts.
At the time of this writing in January 2020, multifamily real estate is considered the darling of asset classes, and has been for quite some time. The ideas of, “Renter Nation”, “The American Dream of Owning a Home Is Gone”, and “This Time Is Different”, are running rampant in the multifamily space. As investors
keep piling more and more capital into apartments, prices keep rising, and returns investors are realizing keep getting lower and lower.
While the U.S. economy has continued to grow over the past decade, every commercial real estate asset has appreciated, but the key is that not every asset class moves in tandem. As mentioned above, multifamily has been significantly leading the pack. The challenge with sticking to only one asset class is that it limits the scope of deals you are willing to do, which in a hot marketplace, makes acquiring properties very difficult. If for example, somebody is reading this in 2020, and they are in the market to purchase value-added multifamily assets at an attractive cost basis, I believe that opportunity is gone until the next cycle.
Expanding your horizons into other asset classes not only widens the scope of deals that you can acquire, but it also makes you a better investor by forcing you to learn new skills and tactics. If you only have experience acquiring multifamily properties, there will be a learning curve in acquiring multi-tenant retail properties, or industrial properties. These asset classes have very different lease terms, expense structures, and landlord responsibilities. Leaning these nuances creates are more well-rounded investor who can take advantage of opportunities that the market presents.
The Key Takeaways Are:
1. Don’t feel stuck in only one asset class where you feel out of control when the market doesn’t cooperate with your strategy.
2. Make the effort to learn other types of real estate, how they work, the pros and cons, and pitfalls to look out for.
3. Contact professionals who specialize in your new asset class of interest. Brokers for example usually specialize in only one or two types or properties. Apartment brokers generally don’t broker retail.
4. Ensure that your investment goals line up with the particular asset class you are exploring. (Don’t purchase a net lease Starbucks if you are looking for cash on cash returns of 12% or more.)
5. Feel confident in exploring other types of real estate, because everyone has to jump in and learn somehow.
Relying on one asset class is challenging, because it requires you to be in the right portion of the cycle in order to purchase anything at an attractive basis. Diversifying into other asset classes provides investors the ability to create a multifaceted business, without the pressures of having to “time” the market, or falling into “FOMO” syndrome (Fear of Missing Out.) This is why we strive to structure a business that adapts to market cycles, being proactive, rather than reactive.