Risk vs. Reward: Different Ways to Invest in Commercial Real Estate

With all the volatility in the stock market, bond market, and banking industry these days, more than ever, investors are looking for investment opportunities that are trustworthy, stable, and that perform well.

Real estate is a historically stable investment opportunity. While there are ebbs and flows in property values, the old truism “they aren’t making more land” stands the test of time.

Enact Partners - Different Ways to Invest in Commercial Real Estate

Nice & Steady

One simple lending metric, loan-to-value illustrates how steady real estate debt investment can be, even in recessionary times.

Loan-to-value (LTV) ratio is a financial term used to assess a loan’s risk. Expressed as a percentage, LTV represents the ratio of the loan amount to the property’s value.

  • High LTVs represent greater risk to lenders, while lower LTVs indicate less risk.
  • In commercial real estate lending, desirable LTVs are generally below 50% for vacant land, below 65% on construction loans, and below 70% for completed buildings.

During the great recession of Dec 2007 to June 2009, the Dow Jones Industrial Average (DJIA) dropped from approximately 14,164 to 6,594—which represented severe declines for many investors. Even the historically stable bond market saw significant value declines in 2022/2023 as the Federal Reserve increased the Federal Funds Rate by 5% in one year.  

So, while it may not be flashy, real estate is considered a steady, long-term asset class—which can be appealing to investors, especially ones looking to diversify their investments or retirement accounts.

Ways to Invest in Real Estate

While all investments come with an element of risk, real estate can provide the kind of stability and returns investors are looking for. Here are three common ways investors can invest in real estate:

Investors can simply buy commercial real estate as “equity investors.” This approach can be expensive, plus it takes a lot of homework, time, and connections to scope out favorable situations. Equity investing also tends to be risky. Investors who don’t have years of real estate experience simply don’t know what they don’t know, and they’re essentially putting all their “eggs” into one property.

In addition, investing directly in commercial real estate means the investor is responsible for maintaining the property, managing tenants, making improvements, and marketing. While many investors hire property management companies to do that kind of work, it still represents a significant level of involvement in the day-to-day.

For equity investors, while there is a potential for high reward, returns are susceptible to market fluctuations and economic conditions, plus cash flow may fluctuate based on property performance. Also, because debt gets paid before equity, equity investors are the last priority for distribution of funds should an investment fail.

A Real Estate Investment Trust (REIT) is a company modeled after mutual funds that owns, operates, or finances income-generating real estate assets such as such as commercial buildings, residential properties, retail spaces, and industrial facilities.

REITs pool funds from multiple investors and are typically traded on major stock exchanges. They offer shares to investors, who become shareholders.

While investing in REITs is simpler than direct equity investment, the value of REIT shares is influenced greatly by market conditions and investor sentiment. Also, those who invest in REITs are investing in an equity position, so they’re once again in last priority position should things go south. Additionally, REITs typically have high-salary managers and bloated overhead costs that eat up most of the projects’ returns.

A “Main Street” (as opposed to Wall Street) private mortgage fund, like the EP Guardian Fund, is a private investment vehicle that pools funds from individual investors and lends those funds to real estate investors, property owners, developers and builders to advance their projects. It is an opportunity to “be the bank.” Private mortgage funds earn returns through interest income and fees associated with the loans they make. Thus, private mortgage funds are not as susceptible to stock market volatility, actions by the Federal Reserve, or other macroeconomic conditions.

With EP Guardian Fund, investors can anticipate stable returns on a regular basis so long as borrowers make payments, which Enact Partners makes likely by performing strict due diligence before lending. We’re proud to report that those who have invested in EP Guardian Fund have experienced over an 8% annualized return with no losses.

Also, investing in a private mortgage fund is investing in a “debt position.” Investors in a debt position enjoy priority in receiving payments over equity investors in case of default, adding an extra level of security.

In addition, the EP Guardian Fund minimum investment is $50,000 for accredited investors. While that’s a significant amount of money, it won’t go far these days for anyone investing in real estate directly. Even modest apartment buildings or retail space can run upwards of $500,000 or more for starters.

What Approach is Right for You?

Investing in real estate, and whether you do so from an equity or debtor position, depends on your specific financial goals, risk appetite, and investment outlook. Some investors prefer the potential higher returns of equity positions, while others prioritize the consistent, stable income and lower risk of debt positions.

The EP Guardian Fund represents a diversity of loan types—land, construction, property improvements, office buildings, retail, housing—and geography across multiple states and regions in the western United States. As such, a downturn in one sector or region tends to have minimal impact on the fund’s overall performance.

If you’re interested in exploring how the EP Guardian Fund could fit into your investing plans, call us at (760) 516-7776 to discuss. Or take a moment right now and use our online Investor Inquiry Form to send us some information about you. We’ll get back to you within one business day.

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