A great many, probably the majority, of regional centers are based on investment models that capitalize on the real estate industry.   Many of these are investments in and developments of medium to large projects and mixed-use commercial and residential facilities.  Their investment models range from profiting from the proceeds of leases and rentals to profiting from property sales. 

At some point in the game nearly all real estate-based regional centers rely on selling at a profit as an integral part of the investment’s exit strategy.  Even if the fund or project continues on as the principal owner, you will quite likely not want to remain a participant for an extended period of time.  Five years is an average target for an RC exit strategy (although you can choose to remain or reinvest, most RC’s operate on this basis, as this time frame coordinates with the length of visa conditions and the time frame for when you will be eligible to apply for U.S. citizenship, if you so choose).  At the end of that five-year period the typical exit strategy is to sell your interests in the real estate investment.

In effect what this comes to mean is that real estate-based investments are highly reliant on the real estate market; that is a market that, as we have seen, can be very volatile and subject to consumer and investor emotion, among so many other factors.  If the market is “down” when you are planning your exit from the investment, you run the risk of taking a serious hit on your initial investment.  Likewise, if the market is struggling during that time when you are relying on leaseholders and rentals for regular returns, that portion of your income that is based on that income could also suffer.

Of course the flip side to all of this is that, just as real estate markets go down and have their periods of struggle, they also go up; and when they go up, the rewards can be staggering.  Historically speaking, real estate investments do pay off in the end, usually in very big ways, as long as you can stay in the game and capitalize at a profitable time.

To summarize real estate-based regional center investments, you could say that there are many factors on which your investment will rely that will be beyond your, or any manager’s, control.  Your return on investment will rely on factors such as the quality of maintenance and good management of not only the fund, but also the properties that are invested in with the fund.  One of the greater benefits to real estate investments is that, as long as the investment was well-planned and “bought right,” the property is collateral for the investments, and offers some amount of security.

Additionally, profitability will rely on the strength of the real estate market.  At times, depending on your willingness to take a loss or minimized return on your invested capital, your time period for investment could be significantly lengthened as you wait for the market to come back to a point of profitability.  This can make that investment period more open-ended, even if the plan is for a five-year exit strategy. This is what creates that element of investment risk; and as we know, all EB5 investments must be subject to some level of risk. 

In the end real estate-based regional center investment may mean higher risk; but on the flip side, that also means it has a potential for higher return and profits.  Only you can decide how those two should be balanced, but something else that you should always remember is this: even though real estate investments as a whole are more of a risk, no two investments are the same.  There are limitless factors which determine how risky a given investment will be.  There are an indeterminate amount of issues that can come into play to raise or lower the risk even between two given real estate investments.  Depending on the level of research and planning, and on market factors and regional impacts, two real estate investments could be very much alike on the surface, and altogether different from an investment standpoint when you dig deeper.

What this means for you as the investor is that you cannot simply choose between one type of regional center investment or another, you also have to choose very carefully between the options within that category.  For any type of investment, you will need to choose one that is proven, well-managed, and solidly backed with an excellent business plan.  Before you do get to the point of choosing among types, however, you will want to consider the merits of infrastructure-based regional centers and their investments, too.

Tomorrow we will look at Infrastructure-Based Regional Centers.