Real Estate Funds: How Can it Achieve 20% Annual Returns?

Real estate funds have traditionally been seen as a reliable, steady investment, but many investors are seeking not just reliability, but also the potential for significant returns. A key goal for investors is to achieve 20% annual returns. As a result, fund managers need to innovate and implement a blend of advanced strategies and technologies that go far beyond conventional property management. However, with meticulous planning and insightful strategies, the goal of the projected 20% return is possible. Andrew McGillivray of McGillivray Capital Partners (MCP) shares the methods MCP uses to achieve their target.

The 20% Return: A New Benchmark for Real Estate Funds

There is evidence suggesting that more Canadian investors are increasingly dissatisfied with the modest and at times volatile returns available from conventional options. Instead, they are actively shifting towards alternative strategies to balance their portfolios that promise the possibility of double-digit returns, often 20% or more. For example, a recent survey by BetaPro by Global X indicated a trend towards more aggressive, risk-reward opportunities in response to frustrations with traditional asset classes underperforming relative to long‐term expectations. 

Generating a 20% annual return for a real estate fund to meet this investor demand is achievable but requires a combination of strategic asset selection, value creation, market timing, and risk management. The challenge lies in moving beyond the conventional, lower-yield models of real estate investing. To reach the 20% target, funds must integrate sophisticated market insights, innovative management practices, and cutting-edge analytical tools into every facet of their investment process. Another key to reaching this goal is purchasing properties with majority equity stakes, to avoid high carrying costs that detract from overall profitability.

Strategic Asset Selection

According to Andrew McGillivray, at the core of every high-performing real estate fund is the ability to carefully select the right assets. Fund managers must employ comprehensive market analysis to identify undervalued or high-potential properties that can deliver substantial returns over time. They carefully analyze demographic trends, local economic indicators, and urban development plans to pinpoint areas with significant growth potential. 

Due Diligence

While the promise of 20% annual returns is undoubtedly appealing, it comes with a commensurate level of risk that must be managed effectively. High-return funds implement robust risk management strategies to safeguard investor capital while still pursuing aggressive growth targets. 

Rigorous due diligence must be conducted through in-depth property inspections, financial modelling, and assessments of building and development costs, along with conservative underwriting and projections.  

Fund managers conduct regular stress testing and scenario analysis to identify potential vulnerabilities and adjust strategies accordingly. Continuous monitoring of portfolio performance and transparent communication with investors are also critical in building confidence and maintaining discipline. Moreover, having contingency plans, and leveraging conservative underwriting, ensures that the fund can respond effectively to unexpected market shifts, thereby balancing the pursuit of high returns with prudent risk management.

Diversification for Resilience

As part of due diligence and risk mitigation, diversification is critical. Real estate funds can provide diversification by including multiple projects in a portfolio. In the example of MCP, each investment fund has at least three different projects that investors are invested in, providing decreased single-project exposure and increased diversification.

Maximizing Real Estate Value and Profitability

Real estate funds need to leverage strategies to build value and optimize profitability, and MCP exemplifies this through a multi-stage process. It begins with purchasing land at a favourable price to establish a solid foundation. They look to enhance the property’s potential through methods like seeking off-market opportunities, creating land assemblies and securing additional density approvals, permitting the development of a mid-to-high-rise condominium building. Pre-construction condo sales help secure financing and validate market interest, paving the way for the construction phase. In the final stage, the building is constructed with a targeted approach that focuses not just on investors, but also on end users, ensuring that the condo units meet genuine market demand and are appealing to those who intend to live in them. Through each incremental phase, from land acquisition to final sale, MCP’s strategy continuously adds value, ultimately resulting in enhanced profitability. 

Strategy of Long-Term Fundamentals

While current uncertainties can cause concerns for investors, choosing companies that prioritize a long-term focus based on fundamentals helps avoid the risks of trying to simply time the market. MCP’s strategy is to be patient and disciplined; instead of focusing primarily on ever-changing headlines, they stay true to data-driven, realistic financial modelling and best practices.

MCP strategically focuses on transit-oriented developments as a core component of its investment approach, recognizing that properties near major transportation hubs tend to experience higher demand and faster appreciation. These locations are highly desirable due to their accessibility, convenience, and appeal to both residents and businesses. By identifying and acquiring prime real estate adjacent to key transit hubs, the company capitalizes on the growing preference for walkable, well-connected communities. 

Another strategy is to emphasize developing units designed to be appealing to those who may want to live in them rather than catering only to investors, ensuring genuine market demand. Investors in MCP funds receive their returns from the profits once development is complete; tailoring developments directly for the homebuyers increases the value and saleability of units in the property. 

Furthermore, by monitoring interest rate fluctuations and securing favourable financing terms, funds can effectively manage debt and optimize capital structures, thereby supporting their aggressive return objectives.

Leveraged Growth Through Equity Partnerships

Equity partnerships are a critical element in the pursuit of high returns, as they allow funds to collaborate with developers and access exclusive investment opportunities. These partnerships facilitate shared risk and reward, ensuring that all parties are aligned in the quest for superior returns. By working closely with developers, funds gain entry to niche projects and early-stage developments that are not typically available to the broader market. 

The Role of Private Equity in Driving Returns

Private equity strategies are another tool. An essential element for reaching profitability is purchasing properties predominantly through equity. By financing a majority portion of the acquisition with equity rather than debt, the burden of high carrying costs, such as interest payments, is significantly reduced. This not only mitigates financial risk but also ensures that operating expenses do not erode profit margins, thereby contributing to stronger overall returns.

Private equity funds are characterized by their active portfolio management and the use of customized investment models. By leveraging sophisticated financing techniques and employing strategic capital allocation, private equity real estate funds can amplify returns significantly. The careful use of leverage, when combined with proactive asset management, acts as a catalyst for rapid appreciation, making private equity a key factor in the pursuit of 20% annual returns.

Institutional Expertise and Professional Management

Achieving a 20% annual return is the result of disciplined execution by highly experienced professionals. Industry expertise is essential, as continuous analysis of market trends, regulatory shifts, and economic indicators is needed to refine investment strategies. 

Experienced management teams, such as MCP’s, with a proven track record in real estate, are essential in executing complex transactions and making timely, informed decisions. This helps their funds stay ahead of market trends, optimizing portfolio performance continuously. Their ability to adapt to changing market conditions and integrate new methodologies ensures that the fund remains on track toward its return targets.

The goal of a 20% annual return in real estate funds is the new benchmark for real estate fund success, one which MCP has stepped up to meet. By integrating strategic asset selection, value-add improvements, macroeconomic insights, and innovative partnership models, MCP funds are transforming traditional real estate investing into a high-return opportunity. 

For investors, the prospect of earning these rates is especially compelling when combined with the inherent benefits of real estate investing, including asset appreciation, inflation hedging, and portfolio diversification. Additionally, the fully managed structure of these funds allows investors to benefit from real estate investments, by receiving their portion from the sales of units in developments within the fund’s portfolio, without the complexities of direct property ownership, such as market research, property acquisitions, construction oversight, zoning and permitting, and a range of other specialized tasks. Through innovation, meticulous planning, and strategic execution, MCP real estate funds not only aim to deliver strong returns but also incorporate disciplined risk management, offering a compelling pathway to substantial long-term wealth accumulation.