The wealthy are well aware of the value of real estate, having made it a cornerstone of their portfolios. However, they may not be familiar with all of the ways in which they can invest in this popular asset class. Here, Stephen Smith a co-founder and principal of Bryanston Realty Partners in Chicago, outlines a limited partnership option that select real estate investors may want to consider.

For all its allure, the moon is not a good real estate investment. Yet, more than 1 million starry-eyed individuals have staked claims to 300 million acres there in the past two decades.

It’s a charming notion, but owning a piece of the moon is not as enriching as the real estate opportunities that exist much closer to home, especially those in the retail industry.

Affluent investors commit an average of 15% of their portfolios to real estate, and for good reason. Real estate can provide additional diversification, an additional income stream, the potential for capital gains and important tax benefits.

Commercial real estate, in particular, has been an attractive investment option because it satisfies the income needs and risk tolerances of a wide range of individuals. A well-chosen commercial real estate investment can provide even conservative investors with an annual return of 7% to 10%, trumping recent returns on investments in stocks and bonds. Investors can earn an additional two percentage points if they are willing to sacrifice some current cash flow for residual value, incur some tenant credit risk and tolerate more leverage.

Individuals can get even higher returns – 15% or more – from investments in retailers with hidden value in real estate, such as Kmart, Mervyn’s and Toys “R” Us.

Most individuals do not have the skills necessary to engage in this type of investment and are best served by joining limited partnerships headed by seasoned real estate professionals.

Opportunities abound for savvy investors in the retail segment of the real estate industry:

· Fickle demand forces retailers to evaluate new store concepts continuously and develop new formats quickly. These new formats often involve space configuration needs that demand a flexible real estate strategy.

· New and constantly emerging concepts cause continuous churn in retail. This churn suggests retail ownership will continue to change, and, in some cases, large retail players will liquidate.

· Powerful mass merchandising companies have huge appetites for new locations. Real estate is not their primary business, and they need efficient acquisition and disposition processes to execute their overall business strategies.

However, investors in the retail segment of the real estate industry must know what they are doing. It is crucial to understand the growth plans and space configuration needs of individual retailers to match those needs with appropriate sites. And with an abundant supply of capital available in the market, investors must possess unique skills that allow them to outperform the competition and add value to real estate portfolios.

The retail segment of the real estate industry can provide generous returns on investment, but those returns don’t come without risk. Individuals are wise to take advantage of an experienced team of specialists with a limited partnership and not try to go it alone.

Discuss this article on the forums. (0 posts)

---