Alternative Investments (Private equity, real estate funds) vs Manhattan condos
Posted by Wei Min Tan on August 6, 2019
Alternative investments (“AI”), other than the more liquid hedge fund strategies, comprise of illiquid investments including private equity, private credit, and real estate funds. Alternative investments are marketed by investment banks such as Goldman Sachs, Morgan Stanley, JP Morgan to high net worth clients. AI is less regulated than traditional mutual funds hence the clients that the banks market to need to be sophisticated, ie Qualified Purchasers and/or Accredited Investors.
Manhattan condos, while not an AI asset, is a good alternative to AI. Here are key differences between Alternative Investments (focusing on private equity, private credit, and real estate funds) and a Manhattan condo.
Deal Example: Investor client’s condo at 200 Chambers Street in Tribeca. High end building in Tribeca commanding commensurate high rents. Excellent amenities and Whole Foods is just behind the building. Close to Goldman Sachs HQ, World Trade Center.
Private equity and real estate fund investors give up control and liquidity
Private equity, private credit, and real estate fund investors delegate control to the manager of the fund. There is usually a tie in period of 7-10 years during which the investor cannot redeem. The only form of liquidity is from fund distributions as the portfolio matures and investments are sold.
An investor of a Manhattan condo retains control of the property. This means a Manhattan property owner can sell or refinance when he so chooses to. We recommend holding the property for at least 2 years given the transaction costs involved. But in the event an investor has a cash flow need, he can sell anytime. This makes a Manhattan condo more liquid than an AI asset.
Manhattan condo requires higher investment amount
The investment amount for alternative investments is usually $250,000.
The entry point for a Manhattan condo is $650,000. If financing with 60 percent loan, the 40 percent equity equates to $260,000 plus closing costs of around $22,000 brings the total investment to $282,000. Usually an investor would purchase a one-bedroom ($1.5 million) or two-bedroom ($2.5 million) as these price points have better quality options. Hence the investment outlay is double or triple the $282,000 example.
Deal Example: 959 First Avenue. Toll Brothers’ new property project required only 10 percent reservation deposit. Represented multiple buyers at $2 million price point. Buy decision driven by location close to United Nations, Blackstone, Blackrock headquarters.
Leverage and returns
Returns for private equity and real estate funds are usually between 10% to 15% based on IRR. This is a leveraged return as there is financing involved.
With Manhattan condos, the all-cash rental yield is about 2.5%. Average annual appreciation is around 8 percent from 1997 to 2019. These are unleveraged returns. With leverage, it magnifies. I am not showing leveraged returns because it’s dependent on each investor, how much downpayment he puts in. With a lower down payment of 30 percent, the leveraged return magnifies roughly 3X. With a higher down payment of 50%, leveraged return magnifies roughly twice.
Investor’s involvement with the asset
Alternative investments are basically a hands off situation for the investor. The investor puts in the money and professional managers make all the decisions while the investor just collects dividends.
With a Manhattan condo, the investor will need to make some decisions. While we can recommend the action to take and coordinate the necessary, the investor still needs to approve a tenant, approve repairs as needed etc. It won’t be completely hands off for the investor.
Alternative Investment or Manhattan Condo?
Both asset classes have their respective pros and cons. I just want to highlight the key differences and present Manhattan condos as an alternative to private equity and real estate funds to investors who are contemplating which to pursue.
What We Do
We focus on global investors buying Manhattan condos for portfolio diversification and long term return-on-investment.
1) Identify the right buy based on objectives
2) Manage the buy process
3) Rent out the property
4) Manage tenants
5) Market the property at the eventual sale
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