Mentioned in the article but it seems many commenters missed it:
The rich get richer because they have access to more choices than the plebes do. There are lots of non-publicly traded investments out there. They have a minimum investment amount that many people cannot afford. A friend sets up and manages RE investment syndication deals - these are where a bunch of people pool their funds and buy RE properties (commercial offices, or large apartment complexes).
He used to require $50K as a minimum investment. He now asks $75K. He is on the low end. I've encountered many that require $100K and require you to be an "accredited investor" - you need either $1M in assets (excluding your home) or earn over $300K if married to qualify.
These investments are potentially higher risk (e.g. if they use your funds for 80% downpayment on a mortgage, and the value of the property drops 10%, you've lost half your investment). But their returns are quite high. For a deal that exits well, the investors typically get over 20% return (annualized). I used to be all about index funds, and then I saw these. You have to find an operator with a good track record, understand the factors at play well enough to evaluate their offering, and if you do your due diligence, then you pretty much always get at least 15% annualized. Most investors wouldn't even consider the investment if they felt it is less than that.
This has no bearing to my comment. In fact, Warren Buffett, being a value investor, likely agrees with me. He would invest in companies where he had faith in their management (i.e. the operators I refer to).
Your link is about comparing index funds with people who manage other funds. None of these people are involved in the business operations. So yes, they suck and index funds do better. The investments I am talking about are where you invest directly in a business. You are not buying stocks in the business, the value of which depends on a fickle market (hence why I explicitly said "non-publicly traded investments"). You are buying equity of the actual business, with a contracted amount of returns (i.e. preferred investor). The operators I spoke of are the people who are actually running the business. In the case of an apartment complex, they are involved in the operations of running the complex.[1]
Don't think in terms of the stock market and index funds. Think in terms of "Hey, I'm starting a business and I'll give you 3% of equity if you give me $50K." The difference is that here they typically aren't starting a business, but buying an existing business (that already has clients, and a revenue history), so it's easy to analyze whether the business will be successful, and get a good forecast of revenue in the first 5 years.
For the record, most of my investments are in index funds so I know where you're coming from.
[1] OK, not really. Most will hand off to a property management company, but they've vetted the PMC before offering the investment to you.
Sorry, but it is clear you do not understand these investments.
REITs, whether public or private, are funds.
I am not talking about funds.
REITs usually invest in multiple vehicles to diversify. When you put in $100K in an REIT, it is spread across multiple properties. Some of it may even be used to lend money.
When you invest in the investment I speak of, you are investing in one property. There is no diversification.
When you invest in an REIT (or even in an index fund), you have no ownership of the actual investment vehicle. The REIT manager(s) do, but you don't.
When you investment in the investments I speak of, you are a part owner on paper (even if you have no say in the operations). As a result, you get all the tax benefits of owning a property. When you invest in an REIT, the tax code does not entitle you to any of those tax benefits. The REIT fund may mislead a bit in their wording, but at most they are saying that they'll pass on some of the tax benefits that they accrue to you, so you get a higher return.
There is little to no regulatory barrier to investing in an REIT, which is why their minimum investments are not that high.
The investments I speak of can allow a maximum of 35 non-accredited investors (by law). That is one big reason they carry such high minimum investments - they need enough money to buy a property and have a limited number of folks who can supply it.
In this thread I speak primarily of RE investments, because that is where I have the most knowledge. But the larger principle I speak of applies to other investments - not just RE (people investing in farms, storage businesses, car washes, hotels, etc). Again, the barrier is a rather large minimum investment and accredited status.
Again, most of my investments are in simple index funds, and I stuck to those for almost a decade because I didn't find anything better. I'm a conservative investor, and I always analyze any investment to see if there's a good chance it will exceed the S&P 500 returns in the long run. If it's not clear that it (easily) can, I do not invest. I suggest you do as I did: Join an investment group, and examine/analyze the investments they present. Learn the risks/rewards, and you'll then see that higher return (but higher risk) investments exist. They are higher risk because they are not diversified.
I also forgot to mention: Better access to tax incentives. Some of the better tax incentives out there only make sense with large investments. Taking RE as an example, there is cost segregation, where you can take most of the depreciation up front (so not unusual to see someone invest $50K, and get $20K depreciation the first tax year - which can be rolled over: They pay no taxes on the first $20K of profit/revenue)
Due to IRS rules on how to do it, it's not profitable for ordinary folks who may own an extra house they rent out, because one has to do a formal study, which has a fixed fee. But if you own an apartment complex with 10+ units, the depreciation gains significantly overcome that fixed fee.
Comments
Mentioned in the article but it seems many commenters missed it:
The rich get richer because they have access to more choices than the plebes do. There are lots of non-publicly traded investments out there. They have a minimum investment amount that many people cannot afford. A friend sets up and manages RE investment syndication deals - these are where a bunch of people pool their funds and buy RE properties (commercial offices, or large apartment complexes).
He used to require $50K as a minimum investment. He now asks $75K. He is on the low end. I've encountered many that require $100K and require you to be an "accredited investor" - you need either $1M in assets (excluding your home) or earn over $300K if married to qualify.
These investments are potentially higher risk (e.g. if they use your funds for 80% downpayment on a mortgage, and the value of the property drops 10%, you've lost half your investment). But their returns are quite high. For a deal that exits well, the investors typically get over 20% return (annualized). I used to be all about index funds, and then I saw these. You have to find an operator with a good track record, understand the factors at play well enough to evaluate their offering, and if you do your due diligence, then you pretty much always get at least 15% annualized. Most investors wouldn't even consider the investment if they felt it is less than that.
But you need a lot of money to get in.
Sounds like the bet Warren Buffett made and won.
https://www.investopedia.com/articles/investing/030916/buffe...
The trope of finding an operator with a good track record is regularly debunked by both the rich and poor.
This has no bearing to my comment. In fact, Warren Buffett, being a value investor, likely agrees with me. He would invest in companies where he had faith in their management (i.e. the operators I refer to).
Your link is about comparing index funds with people who manage other funds. None of these people are involved in the business operations. So yes, they suck and index funds do better. The investments I am talking about are where you invest directly in a business. You are not buying stocks in the business, the value of which depends on a fickle market (hence why I explicitly said "non-publicly traded investments"). You are buying equity of the actual business, with a contracted amount of returns (i.e. preferred investor). The operators I spoke of are the people who are actually running the business. In the case of an apartment complex, they are involved in the operations of running the complex.[1]
Don't think in terms of the stock market and index funds. Think in terms of "Hey, I'm starting a business and I'll give you 3% of equity if you give me $50K." The difference is that here they typically aren't starting a business, but buying an existing business (that already has clients, and a revenue history), so it's easy to analyze whether the business will be successful, and get a good forecast of revenue in the first 5 years.
For the record, most of my investments are in index funds so I know where you're coming from.
[1] OK, not really. Most will hand off to a property management company, but they've vetted the PMC before offering the investment to you.
You are promoting private REITs like they are something special when they aren’t.
Sorry, but it is clear you do not understand these investments.
REITs, whether public or private, are funds.
I am not talking about funds.
REITs usually invest in multiple vehicles to diversify. When you put in $100K in an REIT, it is spread across multiple properties. Some of it may even be used to lend money.
When you invest in the investment I speak of, you are investing in one property. There is no diversification.
When you invest in an REIT (or even in an index fund), you have no ownership of the actual investment vehicle. The REIT manager(s) do, but you don't.
When you investment in the investments I speak of, you are a part owner on paper (even if you have no say in the operations). As a result, you get all the tax benefits of owning a property. When you invest in an REIT, the tax code does not entitle you to any of those tax benefits. The REIT fund may mislead a bit in their wording, but at most they are saying that they'll pass on some of the tax benefits that they accrue to you, so you get a higher return.
There is little to no regulatory barrier to investing in an REIT, which is why their minimum investments are not that high.
The investments I speak of can allow a maximum of 35 non-accredited investors (by law). That is one big reason they carry such high minimum investments - they need enough money to buy a property and have a limited number of folks who can supply it.
In this thread I speak primarily of RE investments, because that is where I have the most knowledge. But the larger principle I speak of applies to other investments - not just RE (people investing in farms, storage businesses, car washes, hotels, etc). Again, the barrier is a rather large minimum investment and accredited status.
Again, most of my investments are in simple index funds, and I stuck to those for almost a decade because I didn't find anything better. I'm a conservative investor, and I always analyze any investment to see if there's a good chance it will exceed the S&P 500 returns in the long run. If it's not clear that it (easily) can, I do not invest. I suggest you do as I did: Join an investment group, and examine/analyze the investments they present. Learn the risks/rewards, and you'll then see that higher return (but higher risk) investments exist. They are higher risk because they are not diversified.
I also forgot to mention: Better access to tax incentives. Some of the better tax incentives out there only make sense with large investments. Taking RE as an example, there is cost segregation, where you can take most of the depreciation up front (so not unusual to see someone invest $50K, and get $20K depreciation the first tax year - which can be rolled over: They pay no taxes on the first $20K of profit/revenue)
Due to IRS rules on how to do it, it's not profitable for ordinary folks who may own an extra house they rent out, because one has to do a formal study, which has a fixed fee. But if you own an apartment complex with 10+ units, the depreciation gains significantly overcome that fixed fee.