Patient Capital: The Winning Strategy of The Big U.S. Real Estate Players

While many investors and others are familiar with family offices, many of the same people aren’t sure about what the term “patient capital” means. Not surprisingly, the word “patient’ does refer to being patient or taking your time before finally achieving what you set out to accomplish. Put it together with “capital,” and the term is another way of saying “long term capital.” Investors will invest in a business without any expectation of earning a significant return in the short term.

A family office is a private company that takes care of the investment and wealth management for ultra-high-net-worth individuals and families. That means people or families with $100 million in investable assets and above. The main goal of a family office is that of organizing the wealth for the next generation.

Investing in patient capital is done in anticipation that investors will earn larger returns and profits in the future. Patient capital is often riskier than other investments, and in most cases the funds are not liquid. While most family offices avoid any type of “risky investment,” they are not on a timeline to invest their funds, and they only do invest when the appropriate opportunities present themselves.

Family offices are different than private equity real estate funds, in that the capital used by private equity funds is institutional. Institutional investors pool their funds in order to purchase securities, real estate, and other investments. They include banks, REITs, pensions, mutual funds and others, and they’re all supposed to achieve a preferred return that is paid to investors and limited partners. Because it’s in their best interest to purchase assets quickly, they don’t have the luxury of waiting for opportunities to come along the same way that family offices do.

Family Offices and Patient Capital

The biggest advantage that a family office has over any other investor or fund is that they don’t have to operate on a timeline. Many family offices that invest in real estate tend to hold the real estate investments for 10 to 15 years, and even longer, and accept no or low cash flow in the immediate term. The expectation is to start receiving more substantial cash flow in the long term, when the asset appreciates and it’s time to refinance, or when the asset is sold, or when income increases in the future. The luxury of having patient capital allows families to take a much longer-term view of their investments, or patiently wait for the right time to invest, thus, helping them create and grow generational wealth. When patient capital invest, it is willing to accept long periods without profit to make a much bigger profit later on, usually riskier and illiquid investments.

Hence, family offices are willing to buy multifamily properties that have bad debt, properties with occupancy levels lower than 90%, and distressed properties. While this is a change from their traditional purchase metrics, they have some good reasons for purchasing these types of riskier assets.

Family offices in the U.S. are focused on multifamily right now for several reasons. First, family offices have multiple sources of income from a wide variety of investments, so they don’t have a need for immediate cash flow. Second, real estate has historically been an excellent investment vehicle to park capital, and in exchange for a higher return later on, they’re willing to forgo any immediate return.

The third reason is that real estate is an excellent investment tool to lower their overall tax burden. Using depreciation and CapEx, family offices are able to offset their income from other sources, which is why many family offices don’t look for the type of investments that generate immediate cash flow.

How Private Investors Adopt the Family Offices Patient Capital Strategy

There’s no question that the investment approach that many family offices take works well, and that includes investing with patient capital and willing to receive a lower or no cash flow in the immediate term.

More and more private investors are adopting the patient capital model today. Many investors are willing to buy and hold for longer periods of time, since it’s getting harder and harder to maintain high yields for short term investments. They are willing to forgo immediate cash flow for a future profit, understanding that in the long run, the returns are much better, and that the opportunity cost of not investing in a low immediate cash flow investment, is far greater than the cost of making no profit at all.

Family Offices: An Investment Partner

Despite the fact that family offices prefer real estate investments that have a hold period of 10 to 15 years and longer, we have been partnering with family offices as investors in our syndications. This is due to the trend that family offices are diversifying their investment portfolio, opting to invest in properties that would normally be excluded from their traditional investments.

One of the key advantages to having a family office is that there is a dedicated team of professionals that analyzes and tracks investments. The team also has a unique understanding of the family’s needs and risk tolerance. When partnering with my firm, they use this knowledge to select investments that meet their family’s investment criteria.

I’ve seen family offices that are focused on one major source of income, while others I’ve seen are diversified across many different investments. One family office invests solely in multifamily properties. They often hire property managers in-house to manage their assets, but when partnering with my firm we handle all of the management tasks. While real estate is their main source of income, any excess cash flow from those assets are often reinvested with venture capital firms for angel investing.

I’ve also seen a family office that owns assets in many different investment areas, from stocks to triple-net leases. Because they’re highly diversified, they don’t focus on any one investment area, and have no single source of income feeding into other investments. The advantage to being highly diversified is that if one of their investment areas experiences a downturn, they have assets in many other areas that will help balance any losses.

We provide two sources of income to our investors. First, we earn money from rents. Because our business model is value-add, we’re constantly looking for ways to generate additional income and fees. The other source of potential income is appreciation when the property sells, after a hold period that is usually 3-5 years.

In addition, real estate provides unique tax advantages for investors, and that includes family offices when they partner with me. If a family office has diversified investments, they can use the depreciation that the IRS offers to real estate investors to reduce their tax liability from other types of investments.

Though family offices are more IRR driven in nature, and are willing to forgo cash flow in the short term, investing in a syndication that pays 6%-7% CoC is a way for them to diversify their portfolio.

Summary

While family offices have grown in the past decade and most investors and others are familiar with them, many are not familiar with the term “patient capital.” Put simply, it means being patient with money that’s invested, with no expectation of receiving quick returns. With regard to multifamily property investments, family offices invest patient capital, and are content with a hold period of 10-15 years and longer, a proven approach that helps them create and grow generational wealth. Compared to our investment approach, we also look for exceptional opportunities, but our hold period is generally 3 to 5 years.

Unlike institutional investors who are on a timeline and tend to quickly invest their funds, family offices can wait for the right investment opportunity to come along. Additionally, family offices have multiple sources of income from diversified investments, so they don’t have a need for immediate cash flow. Many family offices invest in real estate thanks to unique tax advantages that help to lower their overall tax burden.

Today, some family offices are trying to diversify their investments, which is why they’re more willing to purchase multifamily properties that have bad debt, properties with occupancy levels lower than 90%, and distressed properties. In addition, many are also now willing to partner with syndicators like myself, accepting shorter hold periods and letting our team manage the properties.

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About the Author

Ellie is the founder of Blue Lake Capital, a commercial real estate investment firm specialized in multifamily investing throughout the United States. At Blue Lake Capital, Ellie partners with both institutional and individual investors to grow their wealth by achieving double-digit returns by investing alongside her in exclusive multifamily deals they usually don't have access to.

A defining factor of Blue Lake Capital’s strategy is founded in utilizing machine learning/artificial intelligence throughout the course of all acquisitions and asset management. This advanced technology enables the company to produce accurate and data-driven forecasting for all assets on a market, property, and even tenant basis. In doing so, Blue Lake is able to lead commercial investments with the full capabilities of today’s technology.

Ellie is the host of REady2Scale , a podcast that highlights honest, insightful, and thought-provoking discussions on the multiple approaches for successful real estate investing.

She started her career as a commercial real estate lawyer, leading real estate transactions for one of Israel’s leading development companies. Later, as a property manager for Israel’s largest energy company, she oversaw properties worth over $100MM. Additionally, Ellie is an experienced entrepreneur who helped build and scale companies by improving their business operations.

Ellie holds a Masters in Law from Bar-Ilan University in Israel and an MBA from MIT Sloan School of Management.

You can read more about Blue Lake Capital at www.bluelake-capital.com and learn more about Ellie at www.ellieperlman.com.