There is a paradox at the heart of modern real estate investing: while there is a tangibility to real estate that other asset classes lack, most passive real estate investors engage in some form of long-distance real estate investing, never viewing the property or properties they invest in up up close and in person.
In a sense, long distance real estate investing has been a fixture of portfolios since the advent of REITs: the constitutive properties within real estate investment trusts are typically spread across a region, if not the entire country. The end investor does not vet out, much less visit, each property within the REIT. This is kind of the point – this investment vehicle disperses exposure across different markets, hence providing built-in diversification. Traded REITs (by virtue of being publicly traded), also provide liquidity. With private-market passive real estate investing now available through platforms like Black Mountain Group, a new form of long distance real estate investing has emerged. Investors can now invest relatively small amounts in distinct properties around the country – tapping into demand drivers in a local market, benefitting from the experience and focus of the GP investor, and pursuing returns that are uncorrelated from public markets.
Unlike REITs, the private investments on platforms like Black Mountain Group are illiquid. While private commercial real estate investments can offer favorable target returns and de-correlation from stocks and other assets, they often entail a hold period ranging from nine months to over five years. This article takes a look at specific considerations for this illiquid, longer-dated form of long-distance real estate investing.
Evaluating a Property You Have Never Seen
While a REIT allows for investing in dozens or even hundreds of properties, private real estate investing platforms allow for investing in one discrete property. This presents opportunity, but also introduces some new considerations as you explore direct long-distance real estate investing.
Perhaps the best way to understand the ins and outs of a property is to take a look under the hood at the relevant supporting figures. Examine the pro forma and make sure it is detailed and not missing any key components. Take a look at the leverage in play: are the LTV and DSCR figures appropriately conservative relative to target returns? Take a look at the capitalization rates involved: does the going-in cap rate make sense in the market, and does the exit (or terminal) cap rate make sense given market dynamics? The bottom line: if you have questions about any of these figures (broadly, or in the context of a specific property), do not hesitate to ask questions. Those underwriting the investment should have full command of these substantive figures and be able to explain and stand by them as you consider the investment. Getting comfortable with these components of an investment are key to long distance real estate investing that makes sense for your portfolio.
Understand the Market & Submarket
Digital platforms now allow for investing in a city or neighborhood you’ve never experienced first-hand. This can be a hurdle for some investors who, understandably, would prefer to reach out and touch a property they are considering for investment. However, digital investment platforms also have the capability to deliver a true-to-life representation of the market and submarket, helping investors get a material sense of the property and its immediate surroundings.
This should be provided quantitatively: sales and/or rental comparable should be provided clearly and transparently. Be sure to look at these figures, keeping an eye out for anything that seems unrealistic or any tenuous comparisons. At a more macro level, the offering documentation should cover in depth the demand drivers within the market and submarket – how is the city or neighborhood changing to support additional real estate development? What are the pertinent local demographic and labor market trends? These figures should be provided, substantiated, and put in the context of the investment thesis.
Real estate investing is both art and science, and there is a qualitative element to understanding a potential investment. Invariably you lose the ability to do this first-hand with long distance real estate investing. However, online platforms can provide an immersive experience to help prospective investors understand some of the ineffable appeal of the property and neighborhood. This could take the form of video or other media that helps provide a feel for the city and immediate neighborhood; an interview with the Sponsor (who in many cases has a local focus) to hear about the market in their own words; and a full set of renderings and other photographic coverage of the property and immediate surroundings.
Long distance real estate investing inevitably lacks some of the tangibility of purchasing a property in your own backyard. However, digital platforms can and should provide plenty of resources to help you understand the property and market, and to bring alive the investment thesis.
Tax Considerations for Long Distance Real Estate Investing
Investing in real estate across markets, states, and deal structures can complicate your tax filings. Passive income from real estate investments is treated differently depending on the state you are in, the state where the income was earned, your total income picture, and various other elements that vary from taxpayer to taxpayer.
Black Mountain Group does not provide tax advice. But we do recommend consulting a licensed tax professional as you get started with long distance real estate investing in order to make sure you fully understand and are prepared for the implications.
The Bottom Line: Do Your Diligence on the Platform
Long distance real estate investing inevitably removes some of the tangibility of the asset class. On the plus side, however, it allows for diversifying across property types, markets, strategies, and hold periods in a way that was virtually impossible for most investors just a few years ago. While the spectrum of opportunities has widened for individual investors, it’s important to keep in mind that long distance real estate investments are only as good as the platform sourcing and underwriting them.
Be sure to get comfortable with the people and diligence practices behind any platform you consider investing with. AMR Global can help perform due diligences services for you.