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Meanwhile, real estate values have fallen by about 15 to 25 percent, particularly in areas such as the office space sector, said Paul Daeshrad, CEO of Starpoint Properties, a company that manages real estate through co-investments. he says. He said those values are expected to recover in the coming years as the Fed lowers interest rates.
Daneshrad has been a real estate investor for over 35 years. His company’s strategy focuses on alpha, or opportunities to generate returns that outperform the stock market. He also looks for asymmetric returns, meaning the upside outweighs the downside risk.
“So if S&P is going to get an 8% or 10% return in a given year, we’re going to try to get 15% to 20%,” Daenschrad said. “If the S&P or Dow is going to make his 12% return, we’re going to try to make him a 20% or 25% return, and we’re going to try to take tax incentives to get even higher returns. will do”. ”
The firm’s riskiest category is its opportunistic strategy, launched in 2002, which combines funds and individual It is a combination of real estate. The annual internal rate of return was 51% until 2022. The S&P 500 returned 8.14% during the same period. The company’s Opportunity Zone strategy consists of development projects in areas where capital is needed. The annual internal rate of return is 14% to 16%. However, because you are using a federal program, your gains are tax-free, but your primary investment must be from other sources of capital gains.
Real estate funds are uncorrelated with the stock market and are a good alternative for investors who want to diversify their retirement portfolio without buying and managing real estate. They also have an element of organic growth, which will increase demand and property values over time, he said.
“Rent rates for most properties, whether it’s industrial land, apartments, office buildings or retail projects, are increasing every year,” Daneshrad said. “So every year, the rent automatically goes up by 3% to 3.5%. So there’s compound growth in that.”
He noted that depending on how the fund is set up, those who invest cash may receive payments from rent and may receive a profit when the property is sold.
Despite the decline in housing activity in 2023, house prices continued to rise, rising 5.5% year-on-year in December, according to CoreLogic. On the other hand, commercial real estate is facing tough valuations and is expected to be volatile in the coming years. As the work-from-home trend continued even after pandemic-era lockdowns, office space values plummeted in some regions.
As with any investment, risk is always present. Dhaneshrad listed his three. One is concerns about a recession that could affect tenants’ ability to pay rent. Rising interest rates increase debt servicing costs. and the risk that the project will fail.
He suggests choosing funds that focus on sectors that are expected to outperform. These include investments in data centers and infrastructure spending backed by government contracts. Ideally, the company should have a long and successful track record of delivering profits for over 20 years. The management team should have first-hand real estate experience and capital in the fund. Finally, the fund must not be overleveraged and its loan-to-value ratio must be less than 60%.
Invest without owning
Similar to real estate investment trusts (REITs), real estate funds provide exposure to tangible asset classes without owning and managing real estate. However, REITs are accessible on stock exchanges. Investing directly through a private real estate fund requires a few more steps.
Earnings from investments are generally classified as capital gains and are taxed at a lower rate than income, especially if you are in a high tax bracket. But there’s another tier of people who can enjoy additional tax benefits, and that’s by using a Roth or Traditional IRA, Daneshrad pointed out.
If you have cash or stocks in a Roth or traditional IRA, you can use some of it to invest in a real estate investment fund. However, he noted that it may need to be done under the guidance of a CPA to avoid unknowingly triggering a tax event.
“The best way for a 9-to-5 person to earn an alpha return is to set up an RIA or Roth, start putting money into it every month, and have them start investing so that capital gains treatment will happen in the future. We invest that money in areas where people can see real growth, and allow that growth to continue to grow,” Daneshrad said.
This process requires investors to identify the real estate funds they are interested in. The company that owns the fund will send you paperwork to sign in the name of your Roth or IRA account, Daneschrad said. Once that is done, the funds from your retirement account will be transferred directly to your real estate fund. He noted that not all funds are eligible for this process, and it is important to determine which funds can receive IRA funds.
If you want to do this, you’ll need to set up a self-directed IRA (SDIRA), says Gary Diamond, a certified public accountant and managing partner at Fishman, Block + Diamond. This means it is not controlled by a third party. A 401(k) cannot qualify unless you first roll it into an IRA.
A portion of these profits can be transferred to real estate assets. Daneshrad recommends allocating only a portion of your IRA to maintain diversification.
Diamond added that because investors do not directly own the property, they cannot claim deductions for property taxes, mortgage interest, depreciation and other real estate-related expenses that landlords can. It is also important to read the terms and conditions of each fund. There may be additional costs for repairs, expenses, and maintenance, which will be covered by his IRA funds.
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