In the current investing climate, Investors and Financial Planners are seeking out alternative investments capable of replacing traditional income streams as low interest rates and volatility in traditional financial assets continues to ravage the performance of investment portfolios. These negative variables, in conjunction with above-target inflation can ultimately cause a ‘real’ (adjusted for inflation) loss for a basic rate taxpayer needs earning less than 4%, and higher rate taxpayers require at least 6%. So where are investors allocating capital in their efforts to bolster investment performance without dramatically altering the risk profile of their overall portfolio?
One particular area of interest for many investors has been the property markets, as distressed sellers seek to liquidate their assets in order to pay down debt or free up balance sheets, well-located real estate can deliver yield of up to 15 per cent per annum. Property assets have been considered as useful income tools for years, yet faith in traditional listed vehicles such as real estate investment trusts and property funds is waning, due in part to the fact that such investments are publicly traded and invariably trade at a discount to net asset values. In fact it is true to say that any securitised investments will display a markedly different cash flow dynamic to that of a direct investment in strategic real estate assets.
The most obvious market targeted by investors in the US housing market, as banks seek to shed vast swathes of foreclosed real estate assets, and a proliferation of agents have sprung up offering investors the opportunity to acquire tenanted properties generating a monthly income equating to an annual yield of between 8% and 18%, although there are a number of mid and long-term risks associated with this investment strategy, including on-going tax liabilities, tenet management issues and of course there is a direct correlation with the on-going economic recovery in the united States which allows for tenants to afford such rental payments.
With such offers it is almost always the case that the selling agent has acquired the property and renovated for a much lower price than the sale price to the end investor, indicating that the real opportunity lies in just such an approach (buy/sell) rather than acquiring a property for the long term. Indeed, taking a more opportunistic approach allows the Investor to remain relatively liquid – rolling original capital over into further acquisitions once one property is sold. This also means that the investor gains a regular profit margin for up to 50% per transaction which making this an interesting take on investments for income, without taking on the long term risks of asset ownership.
Another option to capture a regular income stream from the opportunity presented by the US real estate market is to acquire mortgage notes. Taking this approach also eliminates the direct liabilities and risks of owning property, as this is taken on by a local counterparty who might acquire and renovated the asset and source a suitable tenant, then in order to free up capital in order to make further acquisitions, an investor offers a loan secured against the property with a low loan to value. This means the investor receives a regular monthly income, and the local counterparty gets to roll over their capital. This deal is often loaded with a further equity share, with the investor and local partner agreeing to sell the property after a number of years and split the capital gain. Throughout the term of the investment, the investor receives their loan payments (up to 9%) and the local partner Investment climate is responsible for all of the tenant issues, void periods, tax, maintenance and management.
Both of these options; buy/sell and mortgage notes offer the investor a low risk alternatives to direct property investments, and can generate income yields of between 9% and 15% per annum. So whilst these options may be less liquid than publicly traded financial assets such as stocks, bonds and cash, they also serve the purpose of reducing exposure to financial markets, as well as bolstering performance and offering a high degree of capital security simply because in both cases, capital is secured against real estate with a much higher capital value than committed capital.