The Benefits of Investing in Privately Held Property Development and Real Estate Companies
2018 started off with incredible momentum for public companies, which lasted well into the year. In one notable milestone, Apple made history when it hit its $1 trillion market cap in August. In another, Amazon’s Jeff Bezos became the richest man in modern history in July, thanks in large part to the company’s record high stock price of $1,841.95. But the good news didn’t last long.
The good fortune of the bull market was threatened in October when the dropped a whopping 800 points in a single day. Investors lost a combined $2.5 trillion in the blink of an eye, and the instability has continued for months.
The fourth quarter has seen its fair share of devastating sell-offs, as investors react hastily to steep drops in market value. Additionally, their fear is further stoked by the uncertainty of trade talks between the U.S. and China. But sell-offs aren’t the only solution. Instead, investors should consider making new investments in privately held companies.
Why invest in private companies
Low-risk, high-yield investments help investors avoid market volatility
There are quite a few benefits to investing in private companies:
• With public companies, insider trading laws typically limit the amount of company information investors can access. By investing in privately held companies, you can not only stay aware of what's happening within a company but also learn everything about their dealings, from estimated debt to operating costs. And, depending on your level of influence, you can even help guide the company through major decisions that directly affect your holdings.
• Private investments don’t track the performance of major stock indices. So, when public companies fall prey to market volatility, as many did in October, your investments are safe.
• Additionally, private companies are often more responsive to investment opportunities, and they account for 53% of non-residential fixed investments. This means stronger returns and steady outperformance of the S&P 500.
There are several ways to invest in privately held companies, but there are two primary areas of interest that demand your attention – property development and real estate.
When you invest in property development companies, your investments are asset-backed, and you’re investing in something tangible. Property developers tend to use retained capital and low-interest bank debt to fund projects. Plus, they often have multiple projects going at once. Not to mention, there’s an ongoing global need for residential and commercial spaces. This creates a perfect low-risk, high yield investment scenario.
To lose money on a property development investment, project costs would have to skyrocket while selling prices rise and values decrease. It’s an unlikely situation, given that the housing market has seen a steady climb since the 2008 financial crisis.
Also, property development allows investors to choose projects and companies at different scales, which helps maintain a diversified portfolio and mitigate what little risk there is.
Investors should also consider privately held real estate companies, such as real estate investment trusts (REITs) or real-estate service companies (i.e. resort operators, timeshare companies, and hotel companies).
These investments allow you to test the waters of the real estate market without holding physical property or leaving yourself vulnerable to market instability. Long-term data suggests REITs continue to perform well, even when the market dips. Also, REITs often pay out a large percentage of taxable income in dividends to shareholders.
And, investors have the opportunity to research historical data and company history before buying stock. This too is a low-risk, high-yield scenario.
As a safeguard against market volatility, consider increasing your investments in privately held companies. And in doing so, be sure to prioritize real estate and property development companies to continue growing your portfolio without sacrificing your gains.
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