Stepping into a meeting with your investment advisor for the first time can be an overwhelming experience. You’ll likely see a whole slew of terms and acronyms you’ve never heard of and you could end up leaving the meeting feeling more confused than when you walked in. Alternative investments? 1031 exchange? Passive investing? Luckily, we’ve got you covered. As the leading wealth development company in the Southwest, our team has decoded some of the most commonly used lingo among investors.
A 1031 exchange allows an investor to sell a property and reinvest the proceeds directly into another similar property, deferring all capital gain taxes. These tax-deferred exchanges can help with portfolio growth and, ultimately, result in a greater return on investment.
Alternative investments are assets that are not considered to be one of the conventional investment types – stocks, bonds or cash. Examples of this include real estate, private equity and recently launched Regulation A offerings. Understanding the growing need for access to alternatives, Caliber has crafted several investment opportunities to meet the needs of every investor.
Assets Under Management
Assets under management is a term used to describe the total market value of the financial assets a financial institution manages. In real estate, this often refers to the assets an investment company owns entirely or in partnership with investors and typically controls the decision-making process for these assets. As an example, you can take a look at the more than $375 million in assets currently under Caliber management. Note that this term does not refer to more traditional property management companies who manage on a fee-only contract and do not have decision making authority.
Diversification is a term you will hear often from investment advisors. It’s a technique used to help lower your risk by building a portfolio of investments that includes a wide variety of projects. The goal is to create the highest potential return with the lowest amount of risk. For example, investing all your money into a single property puts you at a higher risk, because if something beyond your control happens to the project, you won’t have a backup of other investments to counteract the loss. You can diversify by investing in multiple assets, in multiple markets and with varied strategies.
The IRR, or internal rate of return, is used to determine how attractive a project or investment is based on projected returns. This is an important tool because it allows advisors to make decisions based on future value versus a project’s current value. When looking at a projected IRR, it’s important to understand the term of the investment. For example, a 10 percent IRR over a five-year term indicates the investors in a project can expect to earn 10 percent per year, for five years – or 50 percent in total return on investment. The IRR calculation takes into account the time-value of money and when the cash flows actually occur. Most real estate projects do not produce income immediately as they need to go through a turn-around process first.
Opportunity Zone Fund
Similar to a 1031 exchange, an opportunity zone fund offers tax deferral opportunities. While the deferral ends on Dec. 31, 2026, this investment option offers a few benefits a 1031 exchange does not. Namely, a reduction of up to 15 percent of your original tax liability – think tax cut – and an elimination of future capital gains from your investment, forever. In order to experience the full benefit, you must be willing to invest for a minimum of 10 years. This program applies to any form of capital gains – sale of stock, a business, a real estate investment and, potentially, even a classic car!
If you have ever considered investing in single family residential or real estate on a larger scale, you likely understand the value real estate adds to your portfolio. However, the headache of managing the properties may have deterred you. Therefore, the best way to describe passive investing is by saying what it is not – active direct ownership. In active direct ownership, you hire a real estate professional and purchase one or more properties. Then as the owner, you oversee the property manager, the maintenance, the financing, the bookkeeping, the tax reporting … and the list goes on.
On the other hand, passive investing allows you to reap the benefits of real estate without the added responsibility. At Caliber, we offer just that. When you invest into one of our funds, like the Caliber Residential Advantage Fund LP, our experienced team takes on the role of managing the entire investment process from acquisition to renovations, management and eventual sale.
Private lending is when a private, or non-government, organization lends money to a project, or person, and these loans generally yield higher returns than bank rates. We offer this opportunity to clients through the Caliber Fixed Income Fund III, LP with investments backed by real assets.
This quick guide to common investment jargon will get you started on the right foot but be sure to ask questions when meeting with an investment professional. It’s your advisors job to guide you through this process – if they say something you don’t understand, speak up and ask for clarification. Interested in learning more? Contact a Caliber representative today.