Yes, you can. You buy assets, which are net leased in their entirety to better-credit tenants. A portfolio of such properties can create a predictable fixed rate of return. It is important to model out the expiration dates for the leases in the portfolio. A net lease is a lease where the tenant is responsible for all the maintenance and upkeep of the property and other expenses; the landlord receives rent and is responsible for nothing. It is similar to a loan.
How can institutional investors structure their portfolio to achieve stable returns?
We have been heavily involved in the real estate market in our country of origin and have built our portfolio in a way that generates stable returns. However, as a newcomer to the U.S. investment market, we are wondering how to circumvent pitfalls when structuring a portfolio in the U.S. in order to achieve a stable and high return. How can we do this?
There are various ways to do this. However, we are not institutional investors, but what we know is each of them (institutional) have different methodologies they work on. There is the simple and standard practice of making sure the portfolio of assets is diversified and historical performance is validated alongside the value add/upside you decide to add to the assets after acquiring. The value add/upside to your acquisition would increase your returns. Most importantly, the diversification of asset classes is always important to have in an RE portfolio.
As you know from your experience in your country, it takes knowledge of the markets, the economy and, often luck to generate stable returns. I look across industry types and often include a disrupter to the mix. I try to balance the term of financings and carefully look at tenants. As you know, it is a lot of work.
As I am a lawyer and not a business person, I am likely not the best person to address this question for you. First, I think you need to identify what is most important to you in your investment strategy: the importance of high returns versus avoidance of risk, as these two objectives work against each other. The U.S. real estate investment market is full of many sophisticated investors who have specific investment parameters (on risk/return profiles) and develop an investment strategy best designed to meet their parameters. More conservative investors often seek to avoid certain things, such as new construction, suburban office or even hotels, as these tend to be more volatile and risky sectors (hotels mostly because of the nightly reset of rents and unknown occupancy rates that can vary based upon many factors). Retail is now viewed as a more risky area due to fundamental changes throughout the industry and an oversupply of retail space in the U.S., and only those with a great deal of expertise who can buy something at a great value should go into that area. Beyond that, I really think you need to first develop your profile for risk and return parameters and then find the right strategy and geographic concentration that fits.