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Guest Contributor: A Defensive Approach to Making Real Estate Investments

By: Dwight Kay, Founder and Chief Executive Officer of Kay Properties and Investments LLC


By: Dwight Kay, Founder and Chief Executive Officer of Kay Properties and Investments LLC

All investments carry risk, be they stocks, bonds or hard assets like real estate, but some investment strategies are less risky than others.

I’ve taken a generally conservative approach to real estate investing over a considerable career, and with much success. My approach has helped mitigate the risks of real estate ownership and investment while maximizing the potential to generate income (positive cash flow), shelter income from tax, and achieve asset-value appreciation. Here are four “secrets” to my success. Please note that past performance never guarantees future results, but sharing my strategies, I believe, will help anyone considering direct real estate investing.

#1: Avoid highly volatile real estate asset classes.

Some asset classes (the type of building) have demonstrated that they are much higher risk and prone to recessions than others. These include hotel and lodging properties, senior housing in many of its forms, and real estate used to produce oil and gas. I highly recommend avoiding these properties and potentially saving yourself from heartache.

Hospitality, for example, has been hit hard by all three recessions since 2000. In 2010, following the Great Recession, U.S. hotels considered distressed by Real Capital Analytics approached 2,500 properties with total debt of $40 billion. Many investors in these properties never recovered even their principal — they lost everything. Fast forward and the COVID-19 pandemic continues to wreak havoc on the hospitality asset class.

Senior care is another tough spot, with senior housing, assisted living, long-term care facilities and nursing homes all subject to regulations that increase the risk and stability of owning and operating them. And that was even before the pandemic created new challenges to caring for a particularly vulnerable population.

Properties used to produce oil and gas also carry above-average risk. Drilling and royalties from energy production are uncertain at best and highly volatile at worst. If an oil well doesn’t produce as expected despite the best due diligence, the underlying asset value can nosedive. Fluctuating oil prices from supply and demand shocks can have the same effect. Buyer beware.

#2: Avoid or at least seriously minimize the use of leverage.

It’s contrarian to invest in real estate without leverage, but it can be done quite effectively. Many of our clients don’t want to increase their risk profiles, especially at a stage of life where they find debt worrisome.

Fortunately, there are no-leverage (debt-free) real estate investments available including debt-free Delaware statutory trusts (DSTs) and debt-free real estate funds. With the pandemic still hovering all over the world and real estate subject to uncertainty and potential distress, a debt-free strategy can be highly attractive for risk-adverse investors such as myself. One thing’s for sure: With private real estate offerings that are debt free with no long-term mortgages encumbering the property, there’s no risk of lender foreclosure.

All debt isn’t bad, but a defensive real estate investment strategy makes limited or no use of debt to potentially mitigate the risks of leverage to an equity investment.

#3: Load your basket (or shopping cart) with more than one egg.

Often high-net-worth investors purchase their own properties. It’s a point of pride, and many find the idea of being a landlord attractive, at least initially. Increasingly, however, many investors have decided that the health crisis and economic headwinds are just too great to justify putting all their eggs in one basket, and that the over-concentration risk isn’t as appealing as in years past — that is, being the sole owner of an investment property.

It’s a timeless defensive strategy to diversify real estate investment capital into multiple properties, multiple geographic locations, multiple asset classes and with multiple tenants and business models. This can be accomplished easily through a range of DST, tenant-in-common (TIC), or limited liability corporation (LLC) investments, though the tax treatment of these structures is different.

Certainly diversification does not guarantee profits or protect against losses, but many investors realize it’s just as prudent to diversify their real estate portfolios as their stock portfolios. For example, instead of purchasing a 96-unit property in Tampa, he or she can diversify their capital across 5,000 multifamily units in a dozen different apartment communities across the Sunbelt and Mid Atlantic.

Or instead of purchasing one net lease medical building for $5 million, they can diversify their capital across 10 different single-tenant net lease properties including drugstores, e-commerce industrial distribution facilities, discount stores, kidney dialysis clinics and more.

#4: Co-invest with others with similar goals as yours.

It’s not mutually exclusive to be a private equity real estate investor and a co-investor — you can be both at the same time. DSTs, TICs, LLCs and qualified opportunity zone funds are among the vehicles you can co-invest in alongside others with similar goals and risk tolerance. Inherently, co-investing is a more defensive play than investing solo and tying up the majority of (or a large portion of) your net worth in a single asset in a single market.

There’s no shame in being a defensive real estate investor. In fact, at the end of the day, the approach may have even more potential to produce a consistent stream of monthly income and long-term appreciation as part of a diversified investment portfolio.

Dwight Kay is founder and CEO of Kay Properties and Investments, LLC, which operates a DST and 1031 exchange property marketplace.

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The views and opinions expressed in the preceding article are those of the author and do not necessarily reflect the views of The DI Wire.