Investments for Income – Where Are Institutional Investors Investing for Income

In the current economic climate of poor yields of government and corporate debt issues (bonds), miserably low interest rates set at unsustainably low levels by desperate central banks, and uncertain equity markets serving up corporate failures and suspension of dividends, Institutional Investors are seeking out alternatives in order to generate income and capitalise on unique opportunities presented by the US real estate market.

Indeed, a number of hedge funds have started investing in residential property, often rented to low income families with rental payments received directly from the US government. And whilst not without inherent risks, there are opportunities to acquire previously foreclosed (repossessed) properties directly from banks at incredible discounts as these institutions seek to rid their balance sheet of illiquid assets in exchange for liquid cash. In these cases, it is not unheard of for single family properties to generate yields north of 25% per annum, although the quality of the underlying assets is often questionable at best, and a certain amount of local experience is required in order to separate the wheat from the chaff.

Recently, publicly listed house-builder Beazer Homes has partnered with KKR & Co. in order to launch a new investment vehicle centred on the acquisition and management of single family homes. The investment vehicle will be structured as a real-estate investment trust (REIT) and will manage the company’s own residential real-estate portfolio and will not initially be available to the public.

In Los Angeles, Colony Capital has raised $750 million from institutional investors for a Phoenix based REOT that is investing in single family homes rented to low income families. The form has so far acquired 600 homes, and has previously invested over $4 billion in defaulted mortgage loans with the Federal Deposit Insurance Corp. The company has said that it plans to expand by the end of the summer to Texas, Georgia and Florida. Again, this REOT will not initially be available to the public.

Whilst real estate assets have always been considered good investments for income investors, there are a host of risks associated with long-term ownership of US real estate, and investors should be aware that a substantial portion of rental income should be allocated to property taxes, management and on-going property maintenance – all of which the direct property investor in responsible for. Colony has said that it will retain at least 50% of rental income to cover on-going property related expenses.

This creates a problem for the investor with only enough capital to acquire one such property, as expenses might far outweigh the income from just one property, and therefore holding a stake in an investment vehicle where the income from multiple properties is sufficient to cover one-off costs that may occur with any one property in a portfolio.

So, whilst this market offers some interesting and tempting opportunities for Investors seeking income, one should take the time to consult with an advisor capable of demonstrating a track record for delivering risk-managed property investment strategies that have performed well in such markets, and where sufficient due diligence is available I order properly asses the inherent risks associated with real estate investment including asset risk, location risk, management/operation risk and counterparty risk.

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