Having looked at the different ways distressed real estate opportunities can be evaluated in the previous article, we can now move on to discuss how it is that these opportunities can be realized by personal investors, without overleveraging, or overweighting a personal investment portfolio.
Right after the culmination of the sub-prime credit crisis (resulting is a massive increase in home foreclosures), the easiest way for investors to get involved in the distressed real estate market was through private funds. These funds were established quickly, and ran efficiently because of their relatively small size. Being generally worth only a few million dollars, the funds would be composed of the contributions of a group of personal investors that would contribute a few several thousand dollars each, in the interests of supporting a group of professional managers.
These mangers would go out and acquire properties that were in good neighbourhoods and conditions, but foreclosed upon because of the synthetic risks created by the crisis itself. From there, they would perform minor renovations to the properties to improve them, and resell the properties at substantial markups. These funds were very well known for creating annualized returns beyond 100%, simply because of the valuation discounts.
Alternatively, investors have begun seeing the value associated with investing real estate investment trusts (REITS), which effectively perform the same service as the previously mentioned private funds, but on a much more industrial scale. Usually being publically listed, these firms go about purchasing or building properties, and then distributing returns to investors through either the resale of these properties, or through the distribution of rental incomes. Famous for their extremely high yields (6-9%), robust portfolios, and tangible portfolio value, these funds have been creating fantastic returns for investors that are only able to invest in the funds in a way that fits a smaller personal portfolio.
The final way in which personal investors have found real estate investment opportunities affordable amongst themselves is by pursuing investments that are directly correlated to the growth of the market itself. For example, mortgage trusts create returns for investors by re-distributing mortgage payment returns as dividends across publicly traded companies.
These companies will see their returns directly correlated to the real estate market because of the way in which buyers generally require debt to purchase a home in the first place. However, because they are removed from direct exposure to the property itself, they are only taking on partial (through still a highly correlated) exposure to the property value itself.