Real estate investments can be a valuable addition to any portfolio, providing opportunities for growth and stability. Effective management is crucial to maximizing returns, whether the properties are acquired strategically or inherited. Whittier Trust’s Real Estate team specializes in identifying and evaluating investment opportunities on behalf of clients, as well as overseeing their existing assets. As we know this can be an unfamiliar asset class to many, we’ve put together a few key considerations and strategies for adding real estate to your portfolio, with insights from Whittier Trust’s wealth management advisors.

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A Long-Term Approach

The current economic landscape is marked by stock market volatility, inflation concerns, and the possibility of rising interest rates. In this ever-changing environment, market factors constantly come into play, as economies and their components remain fluid. Our team of real estate experts at Whittier Trust emphasizes the importance of a long-term approach to invest in real estate , despite the challenges posed by interest rate hikes. We prioritize thorough vetting of properties and their surrounding environments, seeking population and job growth over time. We also focus on major cities with a proven track record, aiming for secure and less speculative investments. While the team evaluates various property types, our recent investments have mostly been in multifamily properties, assessing factors such as increasing rents, high occupancy rates, and strong housing demand. Whittier Trust takes a patient approach, typically looking at investments on a 10 to 12-year horizon to ride out economic cycles and produce solid returns for our clients.

Interest rates play a crucial role in real estate investing, influencing property valuations and affordability. The recent increase in interest rates has created a need for a nuanced approach to ensure optimal outcomes for Whittier Trust clients. Rising interest rates have outpaced property valuations, resulting in lower unlevered yields and initial debt service funding requirements. However, Whittier Trust’s Real Estate professionals seek solid investments that offer growth opportunities, aiming to generate lucrative returns even in the face of interest rate fluctuations. Additionally, the potential for refinancing at more advantageous rates over the property’s lifespan remains an option. This long-term investment strategy aligns with Whittier Trust’s focus on legacy-building, as real estate assets historically tend to recover their value and provide stability over time. By thoroughly researching market conditions and adhering to conservative investment practices, Whittier Trust ensures the fundamentals of their real estate investments are sound, including selecting prime locations and partnering with top-notch management while avoiding excessive debt burdens.

Capital Expenses

Regular maintenance is crucial for the upkeep of any real estate property, be it a multi-tenant building, warehouse, or office. While routine maintenance suffices for most issues, there are times when significant investments are necessary to address larger problems like roof replacements or air conditioning upgrades. Real estate owners need to anticipate and prepare for such non-routine maintenance and unforeseen expenses. Failure to do so can result in financial strain, with landlords and owners having to dip into distribution funds or resort to capital calls. By proactively planning and setting aside funds for unforeseen problems, property owners can mitigate long-term costs and ensure the longevity of their assets.

One key aspect often overlooked in the management of high net-worth properties without debt is the need for consistent capital reserves and regular inspections. Unlike properties with debt, these assets lack a constant reminder or oversight, making budgeting for capital expenses less of a priority. However, given that real estate is often a generational asset requiring ongoing maintenance, neglecting capital reserves can be detrimental. Creating a five-year capital plan and allocating funds at a rate of 20 cents per square foot per year allows property owners to prepare for major capital costs such as roof replacements and HVAC system upgrades. Such planning safeguards distributions, maintains cash flow, increases property value for potential sales or refinancing, and prevents devaluation due to deferred maintenance.

Property owners, particularly those who have held ownership for an extended period, may underestimate the expenses involved in property maintenance. Unlike stocks, real estate cannot be easily sold in parts, making comprehensive care and cost-effective maintenance essential. Obtaining multiple bids for every project ensures that property owners secure the most economical solutions for their properties. By planning and preparing for unexpected capital expenses, property owners can safeguard their finances and prevent unpleasant surprises. Continuously maintaining and upholding a property through the creation of a capital plan is vital for its long-term success.

Incorporating real estate into your investment portfolio can be a wise decision, but it requires careful planning and management. Our team emphasizes a long-term approach, considering factors such as population and job growth, major cities with a proven track record, and secure investments. While interest rate fluctuations pose challenges, we’ve found that seeking solid investments that offer growth opportunities and align with a legacy-building focus has proven to be the best practice. Furthermore, property owners must proactively plan for capital expenses and unforeseen maintenance costs to ensure the longevity and value of their assets. By adopting a comprehensive approach to real estate investing and maintenance, investors can navigate the market successfully and achieve solid returns over time.