Investing 102

[GregWeld]

Originally Posted by chichirone

Going to school on these. If you had an opportunity to invest in shares of a commercial real estate LLC or buy real estate shares publicly shared, which would be more attractive to you? Better question may be, what attributes would you look at if considering a commercial real estate LLC that is being organized to buy a single location or land development project?

Single entities always assume more risk. Then you're really investing with the management -- which is fine if you know them and their history of bringing successful developments to market. I've been investing with a guy in apartment buildings for 20+ years and every one of them has a been a total score. My biggest fear is if he dies... Then what? I really have never asked him.. and maybe I should.

Smaller money --- more LIQUID --- as in way way way more liquid is a publicly traded REIT such as the ones I mentioned earlier "O" and "NNN" as well as many others. You can sell with a click of the mouse. Not so in LLC's where you're a minor partner and really have ZERO control as an investor.

If you have tons of money -- don't have any need for it (as in see it go to zero) and have no immediate (5 to 10 years) need for the cash for "other stuff" -- then LLC's have some nice tax benefits such as depreciation etc that work pretty well... and if there's cash flow (interest)... and the upside of a sale and return of principal down the road - they can be real corkers! I was in a 344 unit class A apartment complex in Tucson that was dead money for 4 years - until it was sold to convert to condos - and returned 117%. I'll take a double in 4 years every day if I could get it. But for 4 years before then I was kicking myself for having ever looked at the deal.

So the criteria for these two commercial real estate investments is:

Do you want liquidity and relative safety with a dividend but no tax benefit or
Do you tie up your money (Illiquid) and increase risk (single entity) with a tax benefit... and a possibility much larger total return out to an unknown date.

I own both types... but I have no liquidity issues either... 20 years ago I knew I was gambling (I was 40 and not 60+) - and it worked out well. I've since invested with the same guy in several apartment complexes but I would NOT invest like this with anyone else if he should quit business or whatever. In my mind - I'm not investing in an apartment... I'm investing in him with and I get his considerable skills.

Good question by the way.