The Biggest Misconceptions About Real Estate Syndications #3: Only Invest in What You Know

The Biggest Misconceptions About Real Estate Syndications

Part 3 in a 3-Part Series

 

In my book, The Alternative Investment Almanac: Expert Insights on Building Personal Wealth in Non-Traditional Ways, I had the honor of interviewing some of the best investors in the alternative investment space and asking them all the same series of questions. Regardless of whether the investor was involved with self-storage, mobile home parks, or ATM funds (just to name a few assets mentioned in the book), they each provided common misconceptions about their specific segment, and it was some of their responses that inspired this series.

In the first article, Syndications Are Completely Passive for the Limited Partner, we discussed the myth about being completely passive. We went through the very active steps needed to get to passivity.

In the second article, Syndications Are Tax Friendly, we discussed how some tax buzzwords are overused and may not apply to the end investor as much as certain operators would like you to think they do.

 

MISCONCEPTION #3: Only Invest in What You Know

 

In this article, we deal with an answer that repeated itself more often that I would have imagined. Many investing legends of the last century, such as Warren Buffet and Peter Lynch, have preached the concept of only investing in segments in which you already have familiarity and experience. Many times, this is still sound advice, but there are times when following this hard-and-fast rule can stop you from making a solid investment.

 

I Have Never Paid a Fee Using an ATM Machine, So How Can I Invest in a Fund Dependent on Fees?

The business model of an ATM machine centers around a transaction fee being charged for using the machine. According to Moneyrates.com, the average fee for a withdrawal for an out-of-network was $4.61, and according to a recent FDIC survey, and estimated 7.1 million U.S. households were unbanked in 2019,meaning that they didn’t hold a checking or savings account with a traditional banking institution. Even within the banked population, a staggering 19.5% of households preferred using the ATMS as their primary tool[1] for taking care of banking needs.

Clearly there is a huge demand for ATMs, including millions of users willing to pay the fee. However, I am not one of them. Before starting my due diligence on an ATM investment for SIH Capital Group, I couldn’t help picturing myself as the end user. I would ask, “When was the last time I paid for this service?” Like most accredited investors, the answer was never. I relied on credit cards and electronic payments, not cash from ATM machines. This caused me to have a bias towards thinking the model had flaws before ever looking into the data. Having an open mind is important when deciding on investment potential, but trusting your gut is even more important—and it’s a lot easier to trust your gut when the data supports the model.

After being first introduced to this space over two years ago, we looked at many potential operators before choosing and performing vigorous due diligence on what we thought was the most ethical and honest operator. SIH Capital Group found only one institutional-quality ATM fund that met the standards of our income fund that we went on to invest with. So far, the experience has been excellent, and our trust in the operator has been rewarded with consistent performance that has allowed this asset class to serve as a valuable role in balancing some of the lower yielding but higher appreciating assets.

Important note: The ATM industry has long seen operators take advantage of high volumes of cash transactions that lend themselves to taking advantage of investors; therefore, the ATM fund industry has a history of more Ponzi schemes compared to other alternative assets. When deciding to allocate some of our fund’s money into the asset class, integrity and honesty played a higher role of importance than is usually the case with our other asset classes.

 

A Similar Story With Self-Storage

 

Self-storage, also known as self-service storage, consists of physical space (such as rooms, lockers, containers, or garages) that can be rented out to individuals or businesses on a month-to-month basis. While longer leases are sometimes available, they are not the industry norm.

Like investing in ATMs, some investors have trouble rationalizing investing in self-storage when they personally don’t use such facilities. This can cause investors to overlook the incredible data that shows since 1987, there has been a mind blowing 166.7 % increase in usage of self-storage in the United States—from 3% of the total U.S. population to now a whopping 8% of the United States paying for self-storage. As one prominent operator in the space put it best, “People don’t get rid of stuff.” If you consider yourself a minimalist, that might be tough to understand, but the data shows more people are paying to store—and it’s your choice as an investor if you wish to profit from that data.

 

Data, Not Biases

 

Investing in alternative investments can be a tricky proposition. While our mission at SIH Capital Group is to simplify the process for accredited investors with a one-stop alternative income fund, the truth remains that we all have inherent biases that come to light when analyzing a new potential investment. There is nothing wrong with incorporating your experiences into that analysis if you can adjust your mindset when those biases prove to be incorrect by the data.

I was surprised to learn that some of the best investors in the alternative investment space acknowledge those biases. The key is they overcame them, and some even became prominent influencers in the very same spaces in which they couldn’t imagine themselves as an end user. In the end, you’ll find that change can be a good thing when it comes to investing.

[1] “How America banks: Household use of banking and financial services,” FDIC Survey (2019), https://www.fdic.gov/analysis/household-survey/.

If you liked this article and wish to continue on your path in learning about alternative investments, please make sure to check out my other educational articles as well as my bookThe Alternative Investment Almanac: Expert Insights on Building Personal Wealth in Non-Traditional Ways

Disclaimer: The information presented in this article is for informational purposes only and does not constitute professional financial or investment advice. The author does not make any guarantees or promises as to the results that may be obtained from it. You should never make any investment decision without first consulting with your own financial advisor and conducting your own research and due diligence. Even though, the author has made reasonable efforts to ensure that the contents of this article were correct at press time. The author disclaims all liability in the event that any information, commentary, analysis, opinions, advice and/or recommendations contained in this article results in any investment or other losses. Your use of the information in this article is at your own risk.

 

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