Real Estate Investing: 101

Following the lackluster August outlook for U.S. housing starts, it would be appropriate to ask why investors should consider putting their money into new home construction.

U.S. housing starts rose less than expected amid a slowdown in the multifamily segment. While starts for multi-family homes dropped 11.1% to an annual rate of 263,000 units, single-family home starts went up 7% to 628,000 units, according to the Commerce Department.

The spike in permits for single-family homes suggested a strengthening of overall housing market, analysts say. David St. Pierre and Mitchell Schneider, co-founders of real estate private equity firmLegacy Capital Partners (LCP1), would add the housing market is both stronger, but also the next hot investment to add to your portfolio.

"Real estate is a great place to put your money," Schneider, who is the firm's CEO, says. "On a risk-adjusted basis, it has a relatively low risk and a relatively high yield in the spectrum of investments with an immediate return."

Launched in 2004 in Cleveland, Ohio, LCP1 focuses on middle market real estate ventures, "deploying capital nationally" through a series of "targeted strategies."
Schneider and St. Pierre both come from real estate backgrounds. The idea behind LCP1 is twofold: to create an opportunity for individual investors to invest outside the exposure to swings in the stock market, and to provide a source of capital for those developing real estate throughout the country.

This pouring of capital into new projects could very well be the answer to spur on home sales. The drag in multifamily starts is likely the result of a surge in mortgage rates, which analysts suggest is in turn a response to a soon-expected tapering by the Federal Reserve of its $85 billion in monthly bond purchases. Cautious developers in smaller markets are the very opportunities LCP1 suggests investors get behind.

According to Movoto Real Estate's October market report, "The steady climb in inventory continues across the country, as prices keep pace despite increased interest rates." The report says there were 105,726 homes on the market in September, as compared to 101,086 in August, an increase of 4.6%.

Their eye is on secondary markets, where you might not typically think to look. So the first thing they will tell you is to forget New York or Los Angeles, and instead think of places like Gainseville, Fla., and San Marcos, Texas, where they went to make their first two investments upon launching the firm.

"The margin for error in communities like New York and Los Angeles is very narrow because there's so much capital chasing after each real estate investment opportunity," Schneider explains. "When you focus on projects in areas that aren't pushing pricing to the highest level, it gives you more options."

That said, investors shouldn't get hung up on a particular city, as much as they should filter opportunities based on the project partner and project's ability to generate yield.

At LCP1, they look for operating partners who have a great understanding of their communities and market expertise because those are the investments with the greatest opportunity for profit.

"We are constantly evaluating the marketplace to identify the next best opportunity for investors to place their money," St. Pierre, president at LCP1, says. "What we're looking to do with our capital today is get our investors an 8% current return in addition to capital appreciation."

St. Pierre will add that because "investment strategies have a shelf life," the firm invests through a series of funds that work now. As a very general guideline, an investor should expect to be required to invest a minimum of $100,000 and up to $500,000.

On a ground-up project that has a cost-upon-completion of about $27 million, the hope is that you've created an asset that is worth a 20% gain. Though, that is not necessarily the case for rehabilitation or retail projects, for instance. St. Pierre says investors should come in with an understanding that it is a "case by case" basis so it is hard to give prospective investors a dollar amount upfront.
To which Schneider would add that "there's a lot of liquid capital out there that needs a home."