What If You Can't Eat The Whole Elephant?

If you look at the individual investors that participate on Wall Street, only a tiny handful can take down a whole company all by themselves. There are a few billionaires who can but they generally don't want to, and typically prefer to share the risk with other people. For this reason, corporations have been organized with shares of stock that are sliced up so that dozens, hundreds, thousands or tens of thousands of investors can participate in the profit-seeking activities of our capitalistic country.

Similarly, if you can't pay for a car all the day you buy it, the finance companies have made it easy to slice it into dozens of payments, each one planned out to be manageable for your monthly operating budget. Homes are the same. Few can pay for a home in cash on day one. The idea of 30 year mortgages helped make it possible for nearly anyone to afford a house.  The goal was, upon retirement, to own you home free and clear. The concept of slicing up the elephant so that it can be eaten in little bite-sized chunks is well understood in the United States. It's part of our capitalistic culture.
 
All risk is managed this way (it is syndicated) but what about bigger pieces of real estate? Is it possible to take down big opportunities by yourself? In most cases, no. And in most cases, real estate is not organized in a stock company format like corporations that can be sliced into small pieces of stock that trade on a daily basis.

Part of the reason for this is that the tax code favors real estate and makes it undesirable to put into a corporation. There are other tax structures that have been developed, such as REITs but the opportunity for retail investors is nominal by the time they get into one of these corporately-managed investments.

That's part of the reason for the emergence of the private placement industry. Private placements make it possible for individual investors, self-directed IRAs, pension funds, and others to participate in much larger real estate investments than anyone could handle by themselves. A well-structured private placement syndication can produce dramatic results for the participants.

Because these entities, which typically are organized in LLCs, can be exempt from regulation by the Securities Exchange Commission and they're not registered the way that public corporations are, there are special some rules that govern who can participate. You have to be somewhat financially successful to be able to participate in these activities, but if you are at that place in your life and you are fortunate enough to be able to invest in private placements, it's a wonderful opportunity that you should explore.

Part of the reason that private placements are outstanding is because the cost of operating a private placement is relatively low, compared to the enormous amount of overhead cash to running a public company with the annual and recurring legal fees, accounting fees, and other regulatory requirements. Private placements are typically light on these expenses, and consequently, the returns that are developed in private placements are much higher than they would be in a comparable public environment. But again, because they're not registered and regulated by the government, only a select few may participate.

Unfortunately, private placements are private, and in order to get in the “club”, one has to meet certain minimum financial criteria. If you live in a big city, it's not terribly difficult to meet these criteria, but not everyone qualifies. For those that do, investing with a group of people, which is the basis of our capitalistic society, is the best way to take down bigger pieces of real estate and it's the best way to profit from the dysfunction of the real estate market that we're experiencing now.

As I watch broadcasts of what's happening in the stock market and the commentators talk about what investors should do, there's a certain assumption that investors will only invest in the stock market, but readers should know there are many alternatives beyond what's offered to you by the companies that control retail investments. And most of those will provide yields that far exceed the returns provided in the equity markets.