In this article we will discuss different types of pooled investments including private direct investing via asset-specific pools, REITs, MICs and investment funds.
What is a pooled investment vehicle?
As its name suggests, a pooled investment vehicle (PIV), sometimes called a pooled fund, is raised by pooling small investments from a large number of individuals. The professional management team responsible for a PIV combines these into a large fund to deploy for investment purposes.
The individual investors are all stakeholders in every investment the fund makes, in proportion to the size of each individual’s investment in the fund.
PIVs are sometimes organized as standalone companies. In other cases they are arranged and managed as entities within a larger business, such as a brokerage house.
What are the benefits of a PIV?
The key benefits of aggregating capital into pools and investing are:
Negotiating Power: Typically small companies do not have the negotiating leverage to purchase assets they want, at the prices they want, compared to bigger entities, due to broker favours and market network. While small companies rely on local market inefficiency to attract better deals, the pools rely on “clout” similar to how Walmart deals with its suppliers.
Professional Management: As pools get bigger, they can have highly paid executives running the business and as a result investors now have access to professional management and administration of their real estate. This does come with a heavy platform cost though. For example the CEO of a medium- to large-sized pool alone might be pocketing $3-$5 million in compensation. That eats into investor returns.
Economies of Scale: Because the PIV allows the entity to make larger-scale investments, the fixed costs of buying, managing and selling real estate goes down per dollar invested.
Diversification: Multiple asset investing pools do provide the benefit of levelling out of volatility in cash-flow distribution, but this often comes at the cost of lower returns. The costs of maintaining a large pool do eat into returns.
Common types of PIVs
Private Real Estate Investment Trusts:
– Six to eight per cent CoC monthly;
– total IRR +/-10 per cent;
– liquid but with hair cuts and;
– with offering memorandum, open to non-accredited investors.
A REIT is a real estate company which operates by pooling money raised from investors (individuals as well as institutions) and using that capital to purchase real estate — often a large portfolio of properties.
While many REITs are traded on public exchanges and anyone can purchase shares, certain REITs are closed or private. These REITs generally have $50,000 or more in minimum investments.
If such a REIT has filed an offering memorandum with securities commissions, they are able to offer their product to non-accredited investors as well.
In certain circumstances, such REITs are also eligible for RRSP investments.
Mortgage Investment Corporation (MIC)
– 6-9 per cent CoC, paid monthly;
– no upside beyond that;
– liquid typically after a one-year lockout and then with hair cuts (four per cent going to one per cent);
– RRSP eligible;
– backed by residential/commercial;
– first and second mortgages up to 80-85 per cent LTV.
These mortgage pools created under the Income Tax Act have strict criteria under which they must operate: A MIC can only invest or manage funds, and cannot manage or develop real property.
A MIC cannot own debts secured on real property situated outside Canada; debts owing by non-residents unless such debts were secured on real property in Canada; shares of the capital stock of corporations not resident in Canada; nor real property situated outside of Canada nor any leasehold interest in such property.
No shareholder (together with related persons, as defined in the ITA) may own, directly or indirectly, more than 25 per cent of the common shares.
The cost for tax purposes of any interests in real property (including leaseholds but excluding real or immovable property acquired by foreclosure after default by the mortgagor) may not exceed 25 per cent of the cost of property.
There are certain restrictions as to maximum debt-to-equity ratio.
Typically, private MICs offer six to nine per cent yield payable on monthly basis to investors.
One way to invest in a non-public real estate investment trust or a MIC is to log in to www.r2-re.com and select one of the many available options. You can also request to meet and or speak with our investment advisors.
Publicly traded REITs, on the other hand, function just like other stock issues traded on the public markets. They can therefore lose value if the market or a given market sector in which the REIT is invested drops. But private REITs also carry risks, for example a general downturn in the economy can have impact on property level leasing.
– 4-5 per cent CoC monthly;
– Total IRR of 8-10 per cent p.a;
– Open- or close-ended (limited liquidity);
– High minimum investment amounts;
– Large stabilized assets in core markets;
– Big platform costs, resulting in lower yields.
Typically such funds are reserved either for the ultra rich or institutional money.
Most offer a very low cash pay out (three-to-four per cent) and have very high minimums to invest ($5 million and up) unless they are made available as a special unit/share class through the IIROC channel. The funds will underwrite that NAV over time will add up to a total return of around seven to nine per cent.
Such funds typically invest in “core” properties, i.e stabilized large income-producing assets with little or no value appreciation potential over time outside of rental growth (especially in today’s cap rate environment).
These funds like the investment to be closed (no liquidity). But if it’s open-ended there are certain liquidity options available, albeit with “hair cuts”.
Property-level direct investing via special purpose vehicle (SPV)
– Asset specific, i.e hard security. Proceeds of asset liquidation always go to beneficial owners after debt payout (if o/s);
– No monthly. All returns at the exit;
– 15 to 23 per cent ROI;
– Equity multiple target 2.0, i.e money doubles during investment horizon;
– Time horizon of 3-4 years, but some longer;
– Development LPs or JVs;
– Open for RRSP and non-accredited investors if offering memorandum filed with Securities Commission;
– Minimum investment usually $50,000 but selectively down to $10,000.
These structures are typically utilized on development projects. At R2 for example, we will team up with certain high-quality developers on trophy projects.
Our investors will come into the SPV pool which is in a JV/LP position with the developer. We take a hands-on approach on the capital management aspect of the project while we leave day-to-day operations management to the developer.
We underwrite these projects to yield 15 to 23 per cent ROI per year for investors typically.
Our SPV will be structured as an LP giving certain tax benefits to the holders of the LP units. Our SPV pool investments are then available to our investor base for a minimum of $10,000 and up. In certain cases, our units will also be RRSP eligible.
In many ways, this structure is best of both worlds: Investors get a unified voice representing their capital on the table and also rely on the expertise of a well-established property developer to the see project through completion.
These are some very subtle differences of such investment vehicles in the market. Investors are encouraged to compare and contrast them.
For more contact us at www.r2-re.com