Investing Moderate Sums in Dull, Steady Markets is Better Than Investing Large Sums in Glamorous, Volatile Markets

Inbound US Realty assists non-US investors in finding and evaluating real estate investment opportunities in the US which call for cash investments ranging from $1 million to $20 million.?? Furthermore, we suggest that non-US investors look for opportunities in medium-sized markets, that is, markets other than New York City, San Francisco, Miami and Boston.

Why focus on medium-sized markets, and why focus on the $1m to $20 million value increment?

Because that strategy offers a competitive advantage to a non-US investor who is not a full-time real estate professional.

What is that competitive advantage?

There are a variety of ways to categorize real estate markets in the United States. One very useful way is to categorize them by risk over time, specifically, risk over time without consideration for whether the real estate is residential, office, warehouse or other.?

By that measure, real estate values in New York City, San Francisco, Boston and Miami (and, to a lesser extent, Los Angeles) are relatively volatile.? In other words, the value of real estate in those markets will, compared to mid-sized markets, tend to increase more rapidly when times are good and tend to fall further when times are bad.??

While there are many theories why this is so, it is likely in part because these are so-called ‘gateway’ markets.? Gateway markets means, in this sense, markets that are most attractive to large and/or institutional investors.? This category includes US and non-US pension funds, Wall Street sources and professional, full-time investors, whether based within or outside the United States.?

A point related to the long-term volatility question is that there tends to be less pressure on land prices in middle markets than in gateway markets. Consequently, the pricing of investment-grade real estate in these alternative locations more closely reflects actual costs of development and construction. As a result of that, these areas, although offering less opportunity for huge profits, also tend to be less vulnerable to market downturns.

All of the foregoing supports the hypothesis that investor demand, the search by investors for yield, has a greater impact on prices in gateway markets than in middle markets. Conversely, user demand (i.e., the demand of tenants and prospective tenants for space) has a greater impact on prices in middle markets than in gateway markets.?

Competition for yield drives yields down.? Consequently, the return on cash invested in dull middle markets will tend to be (and, market data indicates, is in fact) higher than the return on cash invested in glamourous gateway markets.

David Borinsky serves non-US investor looking for a path to buying US real estate that includes trustworthy brokers, reliable property managers and a tax-friendly ownership structure. ?

David Borinsky has decades of experience in US real estate and tax law.? He earned an LLM in US Taxation from New York University and an LLM in International Taxation from Leiden University.