Real estate investment trusts such as The Blackstone Group, Colony Capital, and Warren Buffet’s, Berkshire Hathaway, are the new face of real estate investing. One word describes what that means to the “average” residential real estate investor, “Ouch!” The largest hedge funds in the world have discovered how profitable it can be to invest in local residential real estate. They are spending tens of millions of dollars monthly and squeezing out smaller, “mom and pop”, investors in many markets around the country. They are buying properties in bulk, hundreds at a time, and with cash.
So, if you were planning to use your Self-Directed IRA to invest in real estate you need to be prepared for stiff competition. To help you appreciate what you’re up against, I’ll give you a brief analysis of my home market, the Washington, DC metro area.
There are three tiers of real estate investors here. The smallest tier (in number) would be the REIT’s we described at the beginning of this article. Although small numerically they are the best capitalized of all three tiers. Because of the “uniqueness” of the DC Metro market their presence is mostly felt in the commercial sector in this area. However, their methodology and best business practices have trickled down to the second tier investors.
The 2nd tier investors dominate and I mean dominate the DC Metro investment market. They too are well capitalized, market savvy, and aggressive. As an investment broker I’ve worked with many of them intimately. I would hate to compete with them if I were a single investor new to the business. They have adopted and adapted the best business practices of the REIT’s as their business model.
They put on their payroll real estate agents that work solely for them. They pay these agents a salary with bonus and commissions. If a property comes on the open market via the MLS, their agents will know about it within seconds, literally. They can even link their mobile devices to alert them when a property hits the market. With a few mouse clicks an offer can be generated and sent to the listing agent for seller’s “e-signature.” How long does all that take? Less than an hour! Try competing with that kind of efficiency!
The 3rd tier is the individual investor trying to eke out a living with a horse and buggy on the information super highway. They are part-time, under-capitalized, and working solo, yet numbers wise this is the largest group of all three tiers. I hope you are beginning to get the picture. Now, let’s add some numbers to our example.
For the sake of discussion let’s say that our total number of investors, all three tiers, is 100. Tier 1 has 5, Tier 2 has 25, and Tier 3 has 70. Again, for the sake of discussion, say there are 100 “investment grade” deals available in the market. How would those deals be distributed?
Tier Number of Investors Number of Deals
1 5 10
2 25 70
3 70 20
Wow! Those numbers might surprise you but they are reflective of the new face of real estate investing. The lion’s share of real estate deals go to the minority of investors. They have the competitive advantages of capital and professional resources. So, how do the rest of us compete? How do we compete successfully against a Warren Buffett?
The answer is simple, we use Self-Directed IRAs/401Ks to access capital, and hire expert professionals to find, analyze, and structure our real estate deals. That’s the key to success in the new real estate investment market—Capital and Professional Resources.
If you have those two things working for you, you won’t just compete you will succeed. Location is the dominate factor in real estate investing. All markets are local and therefore unique. The DC Metro area is a prime example of this uniqueness. Although close in proximity, northern Virginia, suburban Maryland, and DC proper are very different in housing prices, inventory, and investor activity.
Tier 1 investors can’t manage well that diversity or uniqueness. Tier 2 investors limit their focus to the most profitable deals or a particular jurisdiction, and that leaves a tremendous opportunity to the Tier 3 investors, you!
With a strategic investing plan, access to capital, and expert professional resources the single investor can do extremely well in this “new” market. We tell our clients not to worry about Warren Buffet, at least not in our backyard! As licensed professionals and real estate investment experts we provide a competitive advantage.
If you would like to know more about growing wealth through real estate investing, call our office or download our free brochure. We’d love to talk to you.