Brian Conlon: What kind of questions would you ask a potential investor if they were to determine whether a REIT or a purchasing real estate would be a better option for them?
Kevin Conlon: Well, I always like to ask an investor to be clear on what your objectives are. I guess there are two elements to this. One is: be clear on what your objectives are and also know what your tolerance for risk is. Typically as I talked with investors, broadly speaking, they seem to fall into two camps.
The older investors who are getting closer to retirement are especially interested in getting high cash flow real estate. Those who are younger and have a long investment horizon ahead of them are interested in the overall return on their real estate investment. So they’re going to be concerned about not just cash flow, but appreciation. They may be more inclined to leverage and use debt to enable them to acquire more properties. And they get a higher internal rate of return when they do that. So if you’re an investor, that’s the first thing you need to figure out. Is ‘why am I considering this investment vehicle? What is my objective?’
The other question has to do with tolerance for risk. Because if you invest in real estate, you do need to have enough education about what you’re investing in so that you don’t do something that’s going to be very costly If you make a mistake. Now, generally, again, as we talked about REITs earlier, you can invest in REITs and the REIT will say ‘Oh, well, we invest in medical office buildings, or we only invest in national credit triple net leases.’ They’ll have a specific fund philosophy and you can do less research and make a decision, jump into the pool, invest, and if it doesn’t work out, it’s very easy to exit.
But if you invest in other forms of real estate, single-family residential or the various forms of commercial real estate or apartments. The ante is a little bigger, you’re putting more capital up. You’re actually taking title to real estate, so you own it. You need to make sure that the asset is being managed correctly. So you’ve got to make sure that you have the right property management in place and so on to make it work. So there are other considerations. Now, the good news is that it will, at least in single-family real estate, there are companies, for example, my own Meridian Pacific Properties that actually do a lot of the leg work on investing in single-family homes. So that our investors don’t have to burn the time doing that.
So our company studies the different Metro areas around the country. They look for which Metro areas in the U.S. have the greatest amount of rent for every dollar worth of real estate that they purchase. Cause that’s a good indicator of what your cash flow is going to look like. They study tax rates, insurance rates, and really get the lay of the land on where good places are to invest. But then they go two steps further. The next step is once you’ve chosen the Metro area, you have to pick the right zip codes and the right subdivisions because some are terrible places to invest. And some are great places to invest and you need to know what makes a place great or substandard. So Meridian does that.
And then the third piece of the puzzle is property management. Because property management will make you or break you. You can invest in the right city and in the perfect neighborhood and the right house in the best condition. But your property manager, if he or she’s not on the ball, I mean, they’re just not going to have a good investment run if that happens. So at Meridian, we try to put in those three pieces. And there are a number of companies that do what we do. And I think that’s really made it good for investors. Because they now have a lot more items on the menu to choose from. And they can use third party experts to set up all the component pieces of investing directly in real estate to get all those benefits of investing directly – depreciation, higher cash flow, and high internal rates of return. But someone else has done all of the due diligence and evaluated all of the things necessary to deliver a really good return.
Kevin Conlon – Principal & Co-Founder || Brian Conlon – Business Development