Investing in private real estate equity – A conversation with Group RMC

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Investing in private real estate equity is often considered an “alternative” investment. However during a wide-ranging conversation with Anthony Guarnieri, Senior Vice President at Group RMC, it became pretty clear that real estate may not be that “alternative”. Join us as we talk about what private real estate equity is, its advantages and disadvantages, who is a good fit for private real estate equity investing, and why golf simulators can improve your investments (watch to the end to find out why). Trust me, you won’t want to miss this enlightening conversation! And, you would like to speak to Anthony, I would be happy to introduce you. Just contact me and we’ll get the ball rolling.

Video Transcript: Investing in private real estate equity – A conversation with Group RMC

Let’s talk investing in private real estate equity and what that means for you.

I’m George Dube, saving the world from tax one vote time at a time.

What is Group RMC?

George: What we’re gonna do today is kind of focus on the, this idea that when we talk about investing in Canadian real estate or any other real estate, we’re often focused on what I’ll call traditional real estate. In other words, bricks and mortar. Some of us may have a little bit more elaborate process in terms of getting into corporations, joint ventures, even limited partnerships. But today we’re gonna have a guest with us that’s gonna really help us understand a little bit more, where a lot of us probably don’t have as much information, but what I’m gonna call private real estate equity. And Anthony’s going to give us some ideas of what that really means, who should be looking at it, how they should be looking at it, and just some background details. But Anthony, take it away.

Anthony: Yeah, thanks so much, George, for setting this up and love to introduce myself. I’d love to the ability to, to talk with you. So my name’s Anthony Guarnieri, I represent group RMC and the families behind group RMC. And what we are is we’re essentially a group of real estate co-investors. And what that means is we look for real estate deals that we wanna acquire. We’ll put in, you know, the due diligence behind that. We’ll source the deals, you know, have a lease up strategy in place, we’ll put in our own capital up with our investors, really all over the world to be able to acquire as a, to be able to acquire the deal as part of a co-investment group. And what this does is it gives us the ability to, you know, scale and go after much larger deals than we would ever be able to invest in as a family alone, right? And so when you do that, and when you start going after the much higher acquisition sizes, and when you start getting into the bigger ticket sizes, you’re pricing out a lot of the smaller players, and all of a sudden your metrics look really, really interesting when you’re going in because you’re, you’re buying from essentially very large institutions. So that’s a little bit about, you know, our, what we do. And we’ve been doing this since we started in the eighties, you know, just a handful of families partnering up together. And over time, you know, the more deals we did, the more our co-investment circle grew. And so fast forward to today, we’re 2.5 billion in assets under management, 21 million square feet across 14 different markets in the us. So what started off as something quite small, you know, became something quite special. And as we continue to grow, we’re always happy to kind of find new partners along the way.

Why invest in real estate?

George: Awesome, so may maybe, we’ll, we’ll start with one of the concepts. I’m sure you’ve run into this before for sure. As real estate investors, we’ll get somebody with some type of financial planning background or investment advisor really trying to scare us away from just about anything other than what I’ll call a traditional liquid portfolio, mutual funds, things of that nature. So without getting into the side argument of why you should invest, for example, into real estate itself, may, maybe you can comment on the fact that okay, why isn’t that necessarily always the, the safest and the best thing for investors to do? Not that we’re specifically saying what every investor should be doing, just some qualified Yeah. Whatever qualified means.

Anthony: Yeah. So I mean, you know, it’s, it’s, and I to your point, right, you can’t really speak for, for every investor or or every financial advisor planner out there. But ultimately, I think what it comes down to is, you know, the real estate space, especially if you’re looking on the private side, similar to like private equity, you know, just, you know, buying by getting into the private equity space, you know, the information isn’t as abundant as when you’re going into the public space, right? And so you have the, you know, the more traditional 60/40 advisor or 60/40 portfolio, you know, that’s a lot of like, you know, there’s a lot of cadence there, right there, there’s a lot of information, everybody has that, everybody has access to that. So you’re, you’re, you’re kind of eliminating as an allocator, as an advisor, you’re eliminating your risk by putting something where everybody kind have access, has access to. And that’s, and that’s understandable. Whereas if bring in the private side, well, you’re gonna have to roll up your sleeve I think a little bit more, you know, do the proper due diligence before bringing, you know, an investment idea to your client. Because you know, your, your reputation is obviously on the line and you, it’s a risk for you to bring something that you’re not a hundred percent confident in. So it does require a little bit more work.

And so I think that that part there is, I think the reason why you’re not, you don’t see it as often as I think you should probably see it, you know, I’ll talk for real estate. I mean, you know, real estate, if I talk to, let’s say an allocator, real estate falls into the alternative strategy. But meanwhile, real estate is the biggest asset class in the world after debt. I mean, we’re always in a building, right? Right. Like, so I mean, how alternative is it, right? Like depending on what you’re doing, what your strategy. So I, you know, and, and we’re very basic. Like we’re, we’re, we’re, we just like to view ourselves as like very, very large landlords. That’s, that’s, you know, we’re not, there’s not, there’s not a really secret, you know, sauce to what we do. It’s, it’s actually really simple. We could talk about that later. But ultimately, just to answer your question is I think the reason is ultimately because there is a little bit more work required to roll it, proceed and do the due diligence on the investment to make sure that you know what you’re getting yourself into. And I think it should be done because, you know, if you’re looking at what’s happening on the listed stuff, you know, and last year was a perfect example. Even if you were invested, let’s say a pub, a REIT, a pub, publicly listed REIT for diversification purposes, you think you own real estate. But then, you know, when markets tank correlation is basically one, right? So I think that there is value, I think it requires a little bit more work, but I think that that’s really where you can, you know, bring access to your investors or to your clients, right? Like by doing that work and, and, and partnering up with a group like us, basically.

What is private real estate equity?

George: Maybe Anthony, if you could just give a, give us a little bit of a description in your mind, how would you define private real estate equity in the first place?

Anthony: Well, I mean, it’s kind of not far off the way you kind of open up the call, which is really straightforward. I mean, our model, our business model as a whole is really as if, you know, you and I getting together and, you know, we’ll put a half a million bucks each or whatever, and we’ll go buy our four plates, right? Yes. That, that’s real estate equity. And then, you know, we’ll put a mortgage on part of it and we’ll run this asset, then we’ll gonna collect the rent. We’re gonna make sure it stays leased up. We’re gonna paint the wall when it’s time to paint the wall, collect our rent paid on our debt refinance, right? Every once in a while you get to refinance a little bit of cash out of the property. And, and that’s pretty much it. So that portion, you know, that we own, that’s basically real estate equity and that’s our investment philosophy, that we’re essentially doing it. But instead of it doing just you and I, it’ll be you myself and maybe you know, 50 other investors. And instead of buying a fourplex, well, you know, maybe we could buy first Canadian, right? We could buy something much, much, much larger, much, much higher quality, a better-quality rental, better quality cash flow. So that’s ultimately our, you know, the way I would describe it in our view and, and how we run our portfolio, which is very basic. It’s again, being a good la buying good real estate and, and being a good landlord.

George: Yeah. And I, I guess I should point out to viewers too, that my family’s also invested with the, the RMC just as the other 50 that you just described here, so well,

Anthony: More than 50,

What are the benefits of investing in private real estate equity?

George: Right? Yes. Yeah. I, I understand. So, so you, you touched on a couple of the, the benefits of in investing in private real estate equity. Are there others that people should be aware of?

Anthony: I mean, I think the most, you know, I, I, I hear this, so, so we deal with a lot of families who have, you know, or, or who have a lot of wealth and you know, the, the way I see it is that, you know, to create that generational wealth, you, you’re either, you know, you’re owning a company, you’re doing insurance, or you’re buying real estate. It, it’s usually one of those three. And then, and I see that over and over and over again. So it’s not, you know, it’s not, that’s not an isolated, it’s usually one of those three. So there is a lot of benefit in real estate, if I would isolate that, because that’s really where you, you can create that, that wealth, that long-term wealth in a very, you know, if, if you, if you know how, in a very tax efficient way, I like to use my grandmother’s an example. So my, I come from a very traditional background, like traditional immigrant background. My grandmother came here, you know, a hundred bucks in her pocket. We’ve all heard the, you know, the immigrant story and, you know, she bought a duplex and then she never sold that duplex. She kept it forever. She doesn’t live there anymore, but, you know, we could rent it and she collects rent and you know, she, she’s now on paper technically a millionaire, right? And, and, but unfortunately when she dies, you know, that’s gonna trigger a, a taxable, you know, situation, right? So, but where, you know, you could actually be tax efficient is kind of kicking that tax liability as far as possible into the future by refinancing and never selling. And that’s where really when you get to create the, the wealth generation.

George: Okay? And, and, and for myself, I mean, again, I can’t speak what other investors do or don’t like, but, but certainly we like being able to have a hands-off approach. So it wasn’t us doing the work, it was team RMC. Yeah. And that, that that’s, it’s nice. Not that we, we have a variety of traditional real estate. I, I expect the majority of my clients will, but they also, there’s only so much you can handle and it, it gives us that diversification aspect as as well. And again, I’m not saying that’s appropriate for everybody. Just a couple of the things that Robin and I liked, and then you’ve already touched on the, the US component to it, and I can assure you, not that I’m a US tax expert in the slightest, but I see some of the pain involved with setting up the structures, maintaining the structures, and to be able to say, Anthony, that’s your problem. That’s worth something.

Anthony: Yeah. So that’s a good point that that is, I think, you know, so what I was referring to was more just kind of the benefits of being in, in private real estate, but then also thinking about like, kind of the benefits that we bring is, to your point, George, it’s really, we have the structures already set up, right? And a lot of the families that we invest with, that’s the reason why is because they become passive. They sit back, they don’t have to worry about getting a call, you know, at three in the morning or four in the morning to, to replace a toilet bowl or, or replace a light bulb, or you don’t get the headaches of actually running the real estate. You know, we take care of that for you. You become passive, you, you collect your rent checks in the form of quarterly distributions. And that is definitely one of the things that we, we do for our investors.

Disadvantages of investing in private real estate equity

George: Okay, so what about the drawbacks? There’s, I can’t all be rainbows and lollipops.

Anthony: Yeah, yeah. I mean, you know, anything that you do, you’re always gonna, you’re gonna have some risk, right? So, you know, investing with us, basically, I would break it down into two, the two important ones I think would be because also the simplicity of our portfolio, and again, we’re just long-term landlords here is your first risk is basically your tenancy risk, right? So you have to view every property as almost like its own company. Your revenue, you have a revenue stream that’s coming in, that revenue is, is, is happening because of the tenants that are there. So you wanna make sure that you’re, you know, well diversified tenants, you know, you wanna make sure that you’re diversified across business, different sectors, you don’t have one tenant that takes up too much space. So we’re mitigating all that, but that is obviously one of the risks. And, and then the second risk is obviously liquidity, right? So we’re not very liquid by nature because real estate is not a, you know, is not a very liquid investment. And we don’t want to pretend like it’s, we, we don’t, we see a lot of groups get into a lot of trouble pretending like, real estate is liquid and everything is liquid until it’s not. Right? So, but that said, you know, you’re, you’re, you are taking on a little bit more of a, a, an illi because of the fact that we’re a liquid. You are taking on that risk that, you know, we’re, we’re gonna be longer term invested in the asset, right? And, but that just means that there’s a time element, but that just means that, you know, even if when things don’t go according to plan, you can still lease space back up, right? I often get the questions like, oh, gimme one of your losers, you know, in your portfolio, gimme a a property that’s not doing so well. Well, the thing is, I can tell you one that’s not doing well today, but you know, in six, eight to 12 months from now, we’ll, it’ll probably be doing well because we’ll have leased up the space. So, you know, that’s kind of how we mitigate those two of the long-term liquid and just thinking about, you know, making sure that we’re always doing a good job as a landlord focusing on fundamentals. And then also how we focus on the fundamentals. Some of the things that we do is like mitigating different business risks across our portfolio by mitigating the tendency, the tendency risk.

How much of a portfolio should be invested in private real estate equity

George: And I don’t, I don’t know if this is a fair question or, or, or one that can be answered. So I, I’ll say let’s try and tackle it from a general perspective, but if somebody’s got X amount of dollars to invest, period, what in your mind would be an appropriate amount to be shifting per perhaps away from that standard stock market type of investment? Yeah. To apparently non alternative investments?

Anthony: No, I like that. Non alternative. So it’s funny because if I look at both sides, so I’ll look at, you know, some of the families that we work with that are very, very heavily invested in real estate, they’re for some reason they just want more real estate. And that’s not necessarily what I’m, you know what I think what I think, you know, most, most people should do, I do think that you should probably be, you know, and this is something you should talk to your financial advisor about, but I do think that there is value in being diversified across different business sectors to be able to take advantage of different opportunities. But you know, if I look at some of our clients, we’re in the 10 to 15% of their portfolio because again, this is, you know, direct real estate, we’re able to offset a lot of the public vol market volatility. It’s a bit more of a boring asset class, but I think that boring can be good. And it’s also where you can get a nice little income stream that’s derived from all the rent rolls that we’re collecting. So I think 10 to 15% is typically where we see, you know, some at five and they work with their way up to 10. But getting into the real estate space, I think makes a lot of sense for, for a lot of, and you have to remember some, you know, they look, well, I have my house, that’s my real estate, right? Right. And then you have more where like, oh, I’m buying a, you know, fourplex. And that’s also, that’s also, that’s essentially private real estate, right? But then you gotta run that, so, you know, depending on, on, on the investor, I think it does make sense to, to have a good chunk, you know, in the private side there’s a lot of value there.

Who should be investing in private real estate equity?

George: And I guess this can be taken a co a couple of different ways, but who should invest in private real estate equity? What type of thresholds? I mean, a lot of people will hear stuff about securities rules and what have you that have to be maintained. And, and, and as I understand it, and I, I’m again not professing in the slightest to be an expert, but they can vary provincially, I think, and there’s more some national rules. But who, who, who should be in your mind looking at the private real estate equity and then who should be looking at RMC if there’s differences between those?

Anthony: Well, I mean it’s, I guess it, who should be looking? I think everybody who, who would qualify as an accredited investor and you know, what qualifies, you know, there’s different rules that qualify as an accredited investor, but I think that anybody who, who isn’t falls in that bucket should be considering it as a way to get access to investments that are not, that they’ll move with the ebbs and flows of the public markets. I do think that there’s a lot of value there and, and we’re seeing it now, you know, just from last year to this year, there’s a lot of value in not being attached to the, to the knee jerk reaction sometimes that you see in the public markets and still being able to, to, to reflect the value properly. So, so, so yeah, I mean, to to see who, you know, I, like I said, I think anybody that kind of qualifies I think should, should at least look into that because yeah, there’s a lot of, lot of, lot of good stuff.

George: And, and is there like what I’ll call personality type for example, that should be investing? I, I, I’m sure you guys don’t wanna deal with somebody obnoxious that type of obvious example, but are, are there things that you’re looking for beyond a dollar figure?

Anthony: Yeah, that’s actually a good point. I think, so if I talk I’ll, ’cause there’s a lot of different real estate strategies out there, so I can’t, you know, there’s, there’s, I I can’t bucket all investors into the same, you know, look, we’re looking for the same thing, but you know, for us, more important than the dollar figure is kind of the like-mindedness. Like if I look across a whole portfolio of clients, you know, everybody understands, or everybody’s in line with the way we like to invest in real estate, which is, we like the long-term nature of it. We don’t like this idea that, you know, we have to sell it in five years. I don’t, you know, we don’t, we just don’t, you know, we don’t like this idea of, of writing momentum, right? We, we often get the question, what, you know, why haven’t you done, you know, multi resident Toronto or multi resident? Well, it’s like, well it’s, you know, it’s, it’s, it can be tough when you’re write when you’re writing that moment. I’m not saying, you know, Toronto has done really, really well, for instance, but, you know, sometimes when you get caught up in the momentum trade, you know, it becomes like, you know, the way our founders, you know, would say it is, it’s like buying a Honda Civic for $200,000 and then selling it for $300,000. It’s like, you know, congratulations you made a hundred thousand dollars, but was that Honda Civic ever worked $200,000 in the first place, right? So I, it’s, you know, there’s, there’s nothing wrong with that. ’cause I mean, there is obviously momentum in a lot of different markets, but it’s like, do you wanna invest that way? So we don’t like term money. We, we like to make sure that we’re making our money on the buy not necessarily predicated on the sell. ’cause at the end of the day, the only thing you can control as an investor is what you pay for something, right? You can’t control where markets are gonna go, what’s gonna happen, interest rates, who the next president’s gonna be. That’s, that’s beyond your control. But if you buy something at the right price, you’re gonna be okay. And if you run that property the right way and you focus on the fundamentals, you’re gonna be okay. You’ll, you’ll, you’ll make less money some years more money, some years, but you’ll always be on the right side of that, on the right side of that because you’re focusing on things that you can control. So if that lines up, if, you know, we get into a meet with an investor who understands, you know, we’re long term and, and we’re, you know, we’re doing it what we think is the right way. Being a good long-term landlord, that’s, I think even more important than the dollar figure. You know, I have a couple of my buddies who, you know, they’re not very big investors, you know, they, they, they like real estate and they’re like, yeah, I would love to participate with you. So for me, that makes a lot more sense because they know what we’re doing and they, they see value in them.

How does investing in private real estate equity help you to get into the US market?

George: Awesome. So how, how does investing with RMC allow people to get into the US market easier, or I, I, I guess really you have a, any two different methodologies for that? Maybe you can describe that to interested parties.

Anthony: Yeah, so the way we raise capital is on a deal by deal basis. So every time, you know, we, we get awarded a deal or you know, we, we’ve done due diligence on a deal, we bring that deal to our investors, investors will have two different avenues of how to participate in that acquisition. Okay? You could come in and get exposure just to that one particular deal, right? So you just wanna own that one deal and you get pure exposure to that one deal. Or you could come in through our master, our master, our flagship fund, which owns a piece of basically everything that we’ve done since the inception date of, of 2016. And then that way it’s a little bit more, it’s hands off even a little bit more. You’re just kind of invested in our philosophy and everything that we do, you grow with us. And, and both options are, you know, they’re, they’re, you’re coming in as an owner at the same ownership level, you know, same, same, same everything, same economics across the board. Really the only difference is how you’re touching the properties. In one, one instance, you’re touching multiple properties, so you’re getting more diversification and in one instance you’re touching more pure and you might wanna have a little bit more say about which, which properties you’re owning. But in both cases, again, same economics, same ownership level across the board. And then the other element to that, especially for, you know, Canadian investors, we do have investors all over the world, but for the sake of this call, we’ll focus on the Canadian investors. We have a Canadian blocker set up. So if you’re a Canadian investor looking to own real estate in the US, if you go do it, you know, go buy the property directly, you’re, you’re gonna have to file for K ones and pay, you know, file taxes with the IRS and, and I’m tell you this and it’s your background, so I know, you know, it’s complicated. I I can let, I’ll let you talk that up right there. And it is, it’s a pain. So what we’ve done is we’ve, we’ve, we’ve launched a Canadian Limited partnership, which is taxed as a US corporation, and it allows for Canadian investors to participate in, indirectly in the asset, but own a piece of the asset directly without having to file for K ones, without having to worry about US estate tax or anything like that. It basically canadianize the investment. So we have that structure set up whether you want to go in into our master feeder or whether you want to go into a direct deal by deal. It’s, it’s totally up to you. And it, it’s, it, it issues a, both cases will issue T5013 at the end of the year, you know, any accountant can file that. And yeah, it eliminates a lot of headaches for our Canadian clients.

Why amenities matter in real estate

George: Yeah. So any, any final comments you’d like to make? And I, I don’t know, it looks like you, from the, kind of the background there, you might be starting a private golf tutoring business, I’m not sure. Did you?

Anthony: We’re, we’re, we’re finding that having amenities back at the office is really driving a lot of people back. So, you know, whatever, whatever we could do,

George: If it works, it works.

Anthony: We had quickly, I’ll I’ll say one quick story. One of the questions that we got is, you know, how have you guys been doing during the pandemic and office and the return to office and how have you guys done? And it’s funny because that’s really been a big driver for us is this whole kind of push of, of land, sorry, tenants working with their landlords to get the employees back because our, our tenants, a lot of our tenants are the employers, right? So the, the employees need to be brought back to the office and they’re trying to find ways to do that. So, you know, having these types of managed free coffee, you know, golf simulators. One of the buildings that we bought, you know, day one of the pandemic, so March, 2020, we bought it, it’s a beautiful tower in Cincinnati downtown. We bought it at 79% occupancy and it needed a lot, a little bit of love, right? So we put about 3 million bucks of renovations in the lobby. We put in a golf simulator, we put in a free coffee stand and it pushed occupancy from 79% to 92% and rents went from $12 ish a square foot. Now we’re renting at 16 a square foot. So if you have the right product, it’s been working really, really well as you can see from behind me and, and also in the numbers. And it’s, it’s really interesting. If you have the right product, you’re, you’re, you’re in, you’re in, you’re in very good shape. So

George: It’s, that sounds to me like it’s, it’s actually more of a research and development tool. So there should be some government grants for that. Yeah, I think my, that should consider the same. Yes. I like this.

Anthony: Exactly, exactly. I have to look into that.

Conclusion

George: Yeah. So thanks to Anthony for, for joining us and sharing some time viewers, please reach out to us. I’m happy to do introductions and what have you. And as I said, obviously my family is working with the RMC group as well, and I do believe in the, not just the product, but as it, it’s, well, the, it’s the service component to, to what’s going on there. I think that part is critical. And, and, and if I can also just chip in a comment to say, one of the things that I also am attracted to is knowing that they’ve also got skin in the game themselves. So we, we see, I think too many people pedaling real estate where someone else is putting up all of the money and all of this and all of that. Whereas I like to see skin in the game

Anthony: And we appreciate that, George. Those are nice words and thank you. And, and thank you for being a partner with us. Like, you know, we’re happy to have you in there with us and yeah.

George: Awesome. Thank you. Thank you everybody. Thank you everybody for watching and I hope you’ve gotten a lot out of this. We have a lot of other materials that are currently done in process and we’ll be done in the future. So please subscribe to our, our different, I’ll call ’em facilities and links and the YouTube, et cetera, but keep getting that information. Very, very happy to see suggestions in terms of future topics and look forward to having the opportunity to speak with you again. Thank you.

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Resources

For additional resources related to building wealth through things like private real estate equity, see: