How to use commercial real estate to diversify your portfolio and generate income

Originally Posted On: https://www.equities.com/impact-investing/how-to-use-commercial-real-estate-to-diversify-your-portfolio-and-generate-income/

Equities News spoke with real estate expert Charles Clinton about the fascinating world of commercial real estate. Clinton is the co-founder and CEO of EquityMultiple, a commercial real estate investment firm that provides accredited investors access to professionally managed real estate transactions.

If you are an individual investor thinking of adding commercial real estate to your portfolio, you have come to the right place. Equities began by asking Clinton the best way to get started as a real estate investor.

“We start by asking investors to identify their investment goals,” Clinton says. “Then we work backwards from there. We present real estate as part of a diversified portfolio that may also include stocks and bonds. You can have a high-growth stock portfolio while also generating stable cash flow with real estate.”

When Clinton talks about commercial real estate, he defines it as anything that provides cash flow including office, industrial, retail, multifamily, self-storage, data centers and even car washes. “Commercial real estate is a much bigger universe that what many people think from reading the headlines.”

EquityMultiple, Clinton says, helps potential investors understand and the structure and risk/return profile of the diverse deals they offer, and empowers individual investors to customize a portfolio to align with their own strategy and goals. They also help with forecasting future real estate trends and curating timely opportunities on behalf of individual self-directed investors.

“That’s where we start. After that, we think about what investments to make that will fit the client’s investment goals and risk tolerance.”

The type of investments each EquityMultiple investor chooses varies depending on the client’s goals as well as their time horizon.

“Many people don’t realize that what is happening to an office tower in Los Angeles has almost nothing to do with an industrial property in Orlando,” Clinton says. “One of our jobs is to help investors understand the particular dynamics and differences at these individual locations.”

That is why it’s so important to have a real estate professional look at the bigger picture.

One of the firm’s goals, Clinton says, is to help educate clients to all of the nuances of investing in commercial real estate, including both the risks and rewards.

“For some people, real estate investing may be intuitive, but we help others understand the basics. That may include explaining the unique vocabulary and language used by commercial real estate investors, as well as helping them understand specific investments, create a business plan and making forecasts.”

In addition to speaking directly with clients, EquityMultiple provides detailed booklets and conducts webinars. “We encourage clients to ask questions so that they are not only educated but they see that everything we do is transparent.”

Clinton explains that real estate investment strategies vary depending on current market conditions. “Right now, we are focused on real estate debt,” he says. “Because interest rates have moved so high, and borrowing costs have increased, there is a tremendous opportunity for investors to generate income,” one of the goals when investing in debt financing.

Fortunately, EquityMultiple has found many profitable opportunities in debt financing. For example, they use private credit to help finance new building construction or even finance distressed properties. The higher that interest rates go, the higher the returns. Through EquityMultiple, individual investors can invest in unique real estate private credit opportunities.

Although commercial real estate valuations have slid considerably since interest rates began climbing in 2022, Clinton sees life coming back to the equity side of real estate.

“We’re starting to see a bottom, which is what we’ve been waiting for since the middle of 2022. Now that interest rates are going to remain higher for longer than anticipated, industrial and multifamily units are valued way below what they were worth a few years ago. We are focused on this segment because we feel these have the best fundamentals. Obviously, office space has been hurt the most, which is why they may have the most value at some point. We’re not quite there yet, but we’re ready to catch a falling knife.”

Clinton says that the goal of equity investing is an annualized return in the high teens to 20%, while with debt financing they want to aim for a 10% to 12% annualized return. In fact, he states that in many ways, EquityMultiple works like an asset manager. “We have a team of people who come from private equity backgrounds. They underwrite, structure, and control the investments to help investors find the biggest upside potential even when economic conditions are challenging.”

When interest rates climbed so high, Clinton says, it helped to kill the commercial real estate market. “Sellers think their property is worth what it was two years ago, and buyers believe it’s worth what it is today. That’s been the story for the last two years. However, we’re hitting that inflection point when higher interest rates are hitting the seller’s cash flow. That is leading some sellers to admit they can’t hold on any longer.”

When sellers give up, Clinton explains, they may sell their property at a discount or even at a loss. It’s similar to investors dumping stocks when the stock market bottoms. Meanwhile, there is a ton of institutional capital on the sidelines waiting for this moment. “We are also trying to make our first buys into a smaller portion of the market,” Clinton says. “We like to focus on deals that are under $40 or $50 million.”

The good news, according to Clinton, is that the Fed is “determined to move rates down, probably by the end of the year. Still, the market has been consistently overly optimistic,” one of the reasons Clinton is taking a “wait-and-see” attitude regarding rates while also looking for profitable investment opportunities.

“When interest rates are moving up, debt is a good place to be,” he explains. Meaning that investors can tap into higher rates on quality projects, secured by quality assets. “We’ve tried to be adaptive first on the debt side and now on the equity side. On the equity side, we’re like a joint venture investor. We’re the partner who does all of the work and brings capital to you.”

In the near future, Clinton sees a number of opportunities. “When you look out into the future, there’s a lot of markets that are going to be chronically undersupplied over the next five to ten years, especially when there are high interest rates.”

If you are interested in looking at investing in commercial real estate, there are minimum financial requirements that must be met based on regulations.

“Our customer base is mostly individuals,” Clinton explains, “which may include doctors, lawyers, as well as finance, technology and media people. The first step is signing up for an account, which looks like a brokerage account on our web site. Then you can browse the types of investments that are available.”

Clinton says you can choose your own properties as a self-directed investor or call the company to discuss various investment options. Some investors may want to meet in person. “We have a team of professionals who will answer questions, talk you through the properties and educate you on how it all works.”

Clinton says if you are interested, go to the EquityMultiple web site or pick up the phone and call. “We’re an internet-based business but also a traditional business with real estate experts who want to speak to customers, help them screen investments, and help with asset management.”