Apple to Oranges; Not all Real Estate is Created Equally.

By Blake E. Robbins

January 7th, 2018

Have you ever been presented an investment opportunity and had no idea how to determine whether the deal was good or not? When we are presented investments, we are forced to examine options that have many different metrics, and these different numbers and measures make it very difficult to quantify the opportunities.

Last fall, I took a road trip with a good friend of mine from Seattle to Montana to go hunting. Maybe you don’t like the thought of tracking through the woods hunting Bambi’s Dad, but bear with me. We stopped at an Apple stand in Eastern Washington to pick up some gifts for the cattle ranchers who let us hunt on their hundreds of acres of pasture land. One of our gifts was a giant box of Washington’s incredible Honeycrisp Apples. Naturally, I had to buy a box for myself as well. These are the freshest, highest quality, best tasting apples that are grown and picked on the same orchard, and delivered across the nation.

I paid about $13.00 for a box - a giant box with hundreds of apples. Amazon sells these apples for $1.48 each. Using that as a comparison, I believe I got a good deal at about $0.07 each. That’s easy math when comparing Apples to Apples. But it’s not so easy comparing real estate investments to real estate Investments.

With the right questions, we can look at things objectively. I’ve discovered that many investors measure investments unfairly, or unequally, simply putting all of their investment eggs into one basket. Not all investments are created equally or can fit in the same categories. As they say, one bad apple can spoil the entire bucket!

When it comes to our investments, we tend to compare things using an Apples to Oranges paradigm, instead of Apples to Apples. A paradigm is an interpretive framework we use to interpret the world around us. I don’t know about you, but it’s really hard to be an expert at everything! It would take far too much time. But, all too often, we make decisions based on what we have already learned, (think we know), or our new understanding.

The savvy investor is aware of the reality that: ‘You don’t know what you don’t know.’ This is a great place to find yourself. Facing this reality puts you ahead of many, and allows you to look at things objectively, rather than with the influence of what everyone else is doing.

If we apply the general rules of investing while analyzing new investments we would have to ask:

• Does this new opportunity perform better than my current investment strategy?
• Does it come at the cost of increased risk, or does it provide the opportunity of reduced risk?

For example, if one was trying to diversify their portfolio into stocks, bonds, real estate, and alternative investments, it would be imprudent to buy 1 random stock, 1 bond, and 1 real estate investment. Was that Enron stock? Was that a bond that has lost value? Was that a vacant property in Detroit? Let’s dive a little deeper into static real estate.

All real estate investments fall into the real estate category. However, one vertical may have a barrier of entry at 1M, offering an annual cap rate of 5%, while another strategy could have an out-of-pocket cost of 60k, but after the down payment and necessary repairs for new tenants, only offers a few hundred dollars a month in cash flow. The development and new construction vertical may produce high returns in the 35% range, but comes at the extremely high costs of money, time, experience, management, and painstaking navigation of civil engineering matters with local municipalities.

So which real estate strategy is the best? The answer is: All of them! However, if you only have 200k of investable cash allocated to real estate, then the higher yielding strategies may be outside of your reach. However, there is a win-win strategy that yields the best of both worlds. You guessed it, Real Estate Funds.

It’s simple. Real Estate Funds remove the high barrier of entry and match your portfolio allocation to the comfort level that you’ve set. Don’t know how to manage massive projects or complexes? You don’t have to. Real Estate is a full time job. The fund manager has the experience and the team in place to work when you cannot. You can rest knowing the work is managed by those with experience. Tired of dealing with tenants? Don’t bother, you can make greater returns without the worry. Want a piece of that development? Go ahead, take as much or as little as you can.

Get the best of any real estate vertical with the right Real Estate Funds.