Real Estate: Why More RIAs are Adding the Asset Class to their Investment Offering

Clients are increasingly interested in alternative investments, and savvy registered investment advisors (RIAs) are taking notice. Per a TD Ameritrade survey, 62 percent of advisors say clients are interested in private equity investments. However, only 45 percent of advisors allocate client assets to alternative investments, and those who do are likely not allocating enough, RIA Intel reports.  

As a result, some high-net-worth individuals are looking for RIAs that include private equity and real estate investments among their offerings. Why do few RIAs traditionally exclude private investments? 

  1. Private equity or real estate investments’ long-term, highly illiquid nature does not always appeal to clients
  2. Clients are sometimes unable to meet the minimum commitment levels
  3. Reporting (both quarterly and annual) may appear cumbersome as the alternative investments are not custodied at the same provider as the RIA

These reasons alone shouldn’t discourage RIAs from offering alternative asset investments, such as real estate funds, to their clients as the benefits of providing a wide range of investment choices may outweigh the perceived challenges. Below are three reasons why RIAs should consider expanding their investment offerings to include private equity real estate funds, especially multifamily properties.

Hedge against inflation

As the likelihood of an inflationary environment in the U.S. becomes greater, investors are looking for investment opportunities that generally perform well in this environment. Savvy investors favor alternatives and real assets over traditional recession-proof investments, like gold, commodities, and TIPS as there is potential for more upside. For example, many real estate investment funds offer investors ongoing cash flow and long-term asset appreciation. Additionally, multifamily real estate acts as a hedge against inflation in three ways: the appreciating value of the property, increasing income (rents) in times of inflation, and depreciating debt. Such an investment can serve as a hedge against rising inflation and perform better than equities and bonds during these times.

Aligned incentives

Private equity real estate investment management firms that own and operate their multifamily assets have skin in the game. Their depth of experience instills investor trust in the fund 

strategy. In addition, owner-operators’ years of experience, coupled with a boots-on-the-ground approach, create opportunities for further asset revenue generation. Particularly, firms that employ a value-add investment approach as they seek other income generating streams such as billboard placement, water bill-back systems, and other pay-to-use amenities to drive net operating income (NOI).

Portfolio diversification

Clients who invest through RIAs often allocate assets to public investments, like stocks, bonds, and commodities. Alternative investments, including private equity real estate funds, offer diversification. RIAs can endeavor to help clients accumulate long-term wealth by allocating to alternative investments as part of a resilient portfolio selection approach that seeks to amplify returns by diversifying equity risk. Additionally, real estate funds offer a broader asset selection, and geographic diversification by capitalizing on high-growth markets outside of the client and RIA’s physical location. 

How can clients invest in real estate?

When it comes to real estate investing, investors have options. They may choose to purchase a property and become the landlord or invest in a single property alongside a real estate operator. They can also invest in a private equity real estate fund that owns and operates various real estate assets that fit the fund’s criteria and strategy.

Each offering has its own risks and benefits. Ultimately, investor goals will determine which route is best for them. For many, investment in a private equity real estate fund is preferable to navigating the challenges of being a landlord. Further, private equity real estate funds are an attractive option due to the opportunity for diversification and aligned incentives.

RIAs are responding to client requests for private investments, and our firm, Lucern Capital Partners, is available to help. We have been engaging with RIAs, some of whom are investing directly, and others who are receiving continuing education on real estate investment.

Contact us to learn more about how Lucern Capital Partners can help you expand your offering to include private equity real estate investments.