By Guest commentary Tuesday, January 30th, 2024

By Sam Shvartsmann

There’s no doubt that Southern California — and the nation more broadly — is facing a housing affordability crisis. Real estate prices and mortgage rates have soared since the start of the pandemic. 

Despite a recent dip in mortgage rates and housing prices, buying a home remains out of reach for many. 

According to the California Association of Realtors, only 11% of households in both Los Angeles and Orange counties can afford the median-priced house. 

Renters too are feeling squeezed, with almost 50% spending more than half of their income on housing. 

The situation is unlikely to change in the foreseeable future. 

California has simply failed to build enough homes over the past two decades to keep pace with demand, resulting in a chronic housing shortage that cannot be solved quickly. 

Meanwhile, rising interest rates have pushed would-be sellers to hold on to their homes for longer than ever because they don’t want to give up the low mortgage rates they’ve locked in. 

This has resulted in even fewer houses on the market and more upward pressure on prices.

While there’s no denying the real challenges confronting prospective homebuyers in our state, there are still ways that individuals and families without the means to purchase a home themselves can take advantage of our region’s lucrative real estate market. 

One of the most accessible ways to do this is through pooled real estate investment funds called real estate syndications, and through real estate investment trusts or REITs. 

The pros and cons of REITs

REITs are generally publicly traded companies that own, operate or finance income-generating real estate. This could be in residential, commercial, or industrial properties. 

Investors can buy shares in REITs on public exchanges. They won’t own the underlying real estate, just shares in the trust, which can be bought and sold on the exchange. 

You don’t need a lot of money to purchase a REIT — often you can buy a fraction of a share through a brokerage firm for as little as $1. 

By law, the trusts must also distribute 90% of their taxable income to shareholders in the form of dividends. 

This makes REITS an attractive investment because they pay out more than most dividend-paying companies. 

Many investors also like REITS because of the low barrier to entry, their liquidity, and the potential to diversify across multiple real estate companies. 

But REITs do come with some downsides. 

Most trusts operate multiple properties, making it hard to know exactly how your money is being invested. 

The shares are also vulnerable to interest rate changes and market volatility and can come with expensive management fees that diminish returns. 

Also, REIT stock prices may not always reflect the true value of underlying assets. 

Syndication investment

Real estate syndications involve a group of investors pooling their resources to invest in a specific property or real estate project. This collaborative approach typically requires more capital from each investor than a REIT, but it still allows investors to access opportunities that may be beyond their individual financial reach. 

Unlike REITs, real estate syndications are private investments, offering a more hands-on and customized approach to real estate investment. 

For example, you can choose to invest specifically in a syndication that buys residential homes in Southern California, thus allowing you to invest in the local property market even if you don’t own a home yourself.  

Syndications are usually overseen by an expert real estate professional or group, which takes on the active role of identifying, negotiating, and managing the real estate opportunity. 

Passive investors contribute capital and have a stake in the properties purchased. 

However, they have limited involvement in day-to-day operations, relying instead on the syndicator’s expertise. 

This model enables individual investors to access larger real estate deals and leverage the collective expertise and resources of a group. This results in potentially higher returns than would be possible if they tried to invest in properties by themselves or purchased REITs.

Again, syndications are not without downsides. 

They are more illiquid than REITS and tend to require a longer time horizon, so they may not be a good fit for investors who need more immediate access to their funds. 

The success of these pooled investments also hinges on the syndicator’s ability to make sound investment decisions and effectively manage the project. 

Red flags to avoid

As with any investment, you need to ensure you understand what you are putting your money toward. 

With both REITs and syndications, it’s crucial to examine the management team’s past performance as inexperienced or poorly managed teams may struggle to navigate market fluctuations. 

Additionally, high levels of debt within a REIT can be a warning sign, as it may expose investors to increased vulnerability during economic downturns.

Investors should also be wary of sponsors who overpromise returns or fail to disclose potential risks associated with the investment. 

As the old adage goes: if it sounds too good to be true, it probably is. 

Final words

Real estate is a proven investment vehicle for building long-term wealth over time and should be part of every person’s retirement strategy. It’s a unique investment vehicle because it offers opportunities to grow principal, generate income and reduce taxes all at the same time. Sophisticated investors have a long history of successfully leveraging real estate to create significant wealth for themselves and future generations. 

That’s unlikely to change in the coming decade as the country — and California in particular — continues to grapple with an extreme housing shortage and Millennials and Generation Z form families and demand homes that can accommodate them.  

Yet unlike stocks, bonds or commodities, real estate requires industry expertise and time commitment to manage. 

A syndicated or pooled investment fund or real estate investment trust offers savvy professionals, business owners and the average family an opportunity to benefit from the long-lasting benefits of real estate investing, but with a hands-off approach similar to other investment classes. 

It also allows people priced out of the housing market to still profit from its growth.

Sam Shvartsmann is the chief investment officer and president of Calabases-based J.A.L. Properties & Investments, a property investment firm. He is also founder of the real estate investment fund SeaCoast Holdings.