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Perch Weath Insights Blog

Alternative Funds for Cash Investors

Today's investors face a challenging market. Traditional banks are paying little to no interest. The stock market hovers around record highs one day, only to plummet the next in the wake of ongoing volatility. The stock market's pendulum-like shifts understandably leaves some investors on edge.

Cash investors looking to diversify their portfolios are left wondering, then, where to turn. Unsure of what to do, some simply do nothing. By some estimates, there is $14 trillion sitting in money market accounts today earning virtually nothing. There must be better solutions-and there are.

In this article, we look at macro-economic investment trends as well as some of the alternative investment vehicles available to those interested in adding real estate to their portfolios.

Current Market Trends

Between 2011 and 2020, the average return on high-yield bonds was just 3.32 percent (source: Morningstar Direct, Standard & Poors, Yahoo Finance, Federal Reserve Economic Data). High-yield bonds are generally considered one of the "better" investments relative to investment grade bonds, Treasury bonds and Treasury bills, which earned an average 1.42%, 0.92% and 0.09%, respectively, during this time. In sum, even the top performing bonds barely kept pace with inflation over the past decade.

Investors have not fared much better by investing in the stock market. Stocks declined, on average, 16 percent annually over the past twenty years (source: Morningstar Direct, S&P 500 maximum drawdowns by year).

The traditional investment portfolio generally consists of 60% stocks and 40% bonds. It's no wonder, then, that investors are looking to diversify their portfolios. Investing in institutional-quality real estate is one way to do just that.

Alternative Investments

One alternative is to invest in a commercial real estate syndicate or fund. Delaware Statutory Trusts, for example, allow accredited investors to co-invest in institutional-quality real estate alongside many others. This lowers the barrier to entry and allows for direct ownership, while the property is otherwise managed and overseen by an experienced third-party sponsor.

However, investments in funds, syndications and DSTs are typically illiquid. This can have an investor's capital tied up from three to seven years or longer, depending on the anticipated business plan and hold period. Those looking to preserve more liquidity opportunities have a few other options if interested in adding real estate to their portfolios.

Real Estate Investment Trusts

A REIT, which stands for "real estate investment trust," is a corporation that owns and/or manages income-producing commercial real estate. There are many types of REITs. Most will focus on a specific product type (e.g., retail, hospitality, multifamily housing, senior living facilities, student housing, office, self-storage, industrial and the like) or geography (e.g., commercial real estate in the Northeast vs. Southwest).

When an individual buys a REIT share, they are purchasing a share of the company that owns and manages the rental property. Shares of publicly traded REITs can be purchased and sold as easily as other stocks, even on a daily basis, thereby providing significant liquidity to investors.

REITs typically have well-defined investment parameters. They then invest in real estate that meets those parameters. By law, REITs are required to return 90% of profits to investors in the form of dividends.

Interval Funds

An interval fund is a type of closed-end fund that offers liquidity to investors at stated intervals - typically quarterly, semi-annually or annually. This means investors can sell a portion of their shares at regular intervals at a price based on the fund's net asset value. However, there is no guarantee that investors can redeem their shares during a given redemption period. As such, interval funds should generally be treated as long-term investments but in turn, will usually offer an illiquidity premium in exchange.

Interval funds can be used to invest in many securities and asset classes, including but not limited to real estate. A single interval fund is not limited to investing in a single asset class; in fact, they can invest in various assets as a means of diversifying their holdings.

Other Income Funds

There are dozens, if not hundreds or thousands, of different types of investment funds. These include equity funds, bond funds, money market funds, mutual funds, and hedge funds. Many investors have started investing in real estate through one of these types of funds.

A real estate income fund is a specific subset of funds that is focused exclusively on investing in income-generating real estate. Real estate income funds provide another entry point for those looking to invest cash in large commercial real estate portfolios. Real estate income funds are particularly appealing to retail investors who want to own institutional-quality real estate that would otherwise be out of reach to them. A real estate income fund pools capital from many investors, and then the fund's sponsor oversees all of the fund's activities - from due diligence and underwriting, to property renovations, stabilization, ongoing management and eventually, disposition. Depending on the nature of a real estate income fund, the fund can have different investment minimums as well as lengthy hold periods and therefore, the capital invested should be considered illiquid during that hold period.

Examples of Funds Offered by Perch Wealth

Perch Wealth is well-known for its DST offerings, but it also provides several vehicles for cash investors looking to diversify their portfolios away from traditional stocks, bonds, and equities. Here is a sampling of some of the income funds available through Perch Wealth today:

ExchangeRight Essential Income Fund

The ExchangeRight Essential Income Fund is a REIT with 254 identified single-tenant, net-leased properties across 196 markets and 29 states. This $531 million offering has targeted investment-grade and historically recession-resilient tenants such as Dollar General, Family Dollar, Walgreens, CVS Pharmacy, Tractor Supply, Hobby Lobby, and Walmart Neighborhood Market. While retail has struggled, generally, in recent years, the nature of these businesses has historically made them uniquely positioned to weather economic uncertainties and periods of economic downturn, as evidenced during the Great Recession and again during the COVID-19 pandemic. Moreover, the portfolio strives for inflation protection through the potential for growing cash flow distributions backed by long-term leases that provide portfolio rent increases in both the primary and option lease periods.

Distributions from this REIT are 100% tax deferred and scheduled to be paid monthly, assuming funds are available. The investment minimum is just $25,000, making this an excellent option for cash investors looking to add real estate to their portfolios while otherwise preserving liquidity.

VineBrook Homes Trust

VineBrook Homes Trust (VHT) looks to capitalize on the growing demand for single-family rental (SFR) housing. Specifically, the fund looks to invest in modestly-priced SFR workforce housing. This strategy reflects the slow pace of entry-level new home construction. Today, fewer than 9% of new homes constructed are priced at $200,000 or below. This has left many with no choice but to rent as home ownership becomes increasingly unattainable. VHT has grown its portfolio of SFRs from 4,200 units in Q4 2018 to almost 13,700 SFR homes in Q1 2021. The ownership team deploys a value-add strategy to improve the condition of these homes, making them attractive to renters willing to pay top dollar. The portfolio has achieved a 98.7% stabilized occupancy rate, with an average monthly rent of $1,044 per home averaging approximately 1,320 square feet.

This REIT is a collaboration between VineBrook, whose operators have been managing SFRs since 2007, and NexPoint, which brings a multibillion-dollar investment platform and significant value-add experience.

VHT is a $1 billion offering for accredited investors, with a $50,000 minimum investment. Accrued distributions are anticipated to be tax-deferred with growth potential, paid on a monthly or quarterly basis, assuming funds are available. VHT could potentially be an excellent option for those interested in investing in a high-demand real estate product type.

Bluerock Preferred Stock

Anyone who is interested in investing in primarily Class A, institutional-quality apartment buildings will want to consider purchasing Bluerock Series T Redeemable Preferred Stock. These are shares of the Bluerock Residential Growth (BRG) REIT, a publicly-listed real estate investment trust that has a diverse portfolio of exceptionally high-quality live/work/play apartment communities located in some of the nation's top-tier growth markets.

Bluerock Preferred Stocks are being offered for as little as $25 per share with a reasonable $5,000 investment minimum. The REIT is scheduled to pay dividends monthly, assuming funds are available.

Because BRG is a NYSE-traded REIT, these preferred shares are redeemable and provide investors with liquidity from day one.

Cantor Fitzgerald Income Trust

The Cantor Fitzgerald Income Trust (CF Income Trust) is a publicly-registered, non-traded REIT focused on investing at least 80% of funds into multifamily, office, industrial and other income-producing commercial real estate properties as well as stabilized, currently income-producing real estate debt (first mortgages, subordinate mortgages and mezzanine capital). The company focuses on investing in long-term, net leased properties as a way of hedging against market cycle volatility and to minimize properties' ongoing capital requirements which, under the net lease structure, are borne by the tenant. These leases also contain rent escalations that further strive to insulate the fund from potential inflation. Moreover, the portfolio's industrial properties are positioned to capitalize on the growing demand for logistics and e-commerce facilities. The fund's multifamily portfolio offers attractive, risk-adjusted return potential with low historical volatility relative to other real estate product types.

CF Income Trust's diversity of CRE assets is further balanced by the 20% of funds set aside to selectively acquire and hold real estate-related securities to support the fund's overall investment objectives.

The minimum investment into the CF Income Fund is just $2,500 for Class D, Class S or Class T shares. Class I shares require a more substantial $1,000,000 minimum investment. The fund anticipates distributions paid to investors each month, assuming availability of funds. The CF Income Trust will appeal to investors seeking to invest in a range of CRE product types, including both debt and equity.

Are you ready to consider investment options that seek to provide greater, more predictable returns on your investments? If so, it might be time to consider investing in a high-yield real estate fund. Contact us today. We be happy to discuss available options with you to determine which combination of investments would be best for you based upon your specific investment objectives.

General Disclosure

Not an offer to buy, nor a solicitation to sell securities. Information herein is provided for information purposes only and should not be relied upon to make an investment decision. All investing involves risk of loss of some, or all principal invested. Past performance is not indicative of future results. Speak to your finance and/or tax professional prior to investing.

Securities offered through Arkadios Capital, member FINRA/SIPC. Advisory Services offered through Arkadios Wealth. Perch Wealth and Arkadios are not affiliated through any ownership.

1031 Risk Disclosure:

  • * There is no guarantee that any strategy will be successful or achieve investment objectives;
  • * Potential for property value loss - All real estate investments have the potential to lose value during the life of the investments;
  • * Change of tax status - The income stream and depreciation schedule for any investment property may affect the property owner's income bracket and/or tax status. An unfavorable tax ruling may cancel deferral of capital gains and result in immediate tax liabilities;
  • * Potential for foreclosure - All financed real estate investments have potential for foreclosure;
  • * Illiquidity - Because 1031 exchanges are commonly offered through private placement offerings and are illiquid securities. There is no secondary market for these investments.
  • * Reduction or Elimination of Monthly Cash Flow Distributions - Like any investment in real estate, if a property unexpectedly loses tenants or sustains substantial damage, there is potential for suspension of cash flow distributions;
  • * Impact of fees/expenses - Costs associated with the transaction may impact investors' returns and may outweigh the tax benefits

author : Ehud Gersten

Ehud is one of the managing partners of Perch Wealth. He is committed to helping and providing guidance to investors with their real estate investments.

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