Patient Capital: The Winning Strategy of The Big U.S. Real Estate Players

While many investors and others are familiar with family offices, many of the same people aren’t sure about what the term “patient capital” means. Not surprisingly, the word “patient’ does refer to being patient or taking your time before finally achieving what you set out to accomplish. Put it together with “capital,” and the term is another way of saying “long term capital.” Investors will invest in a business without any expectation of earning a significant return in the short term.

A family office is a private company that takes care of the investment and wealth management for ultra-high-net-worth individuals and families. That means people or families with $100 million in investable assets and above. The main goal of a family office is that of organizing the wealth for the next generation.

Investing in patient capital is done in anticipation that investors will earn larger returns and profits in the future. Patient capital is often riskier than other investments, and in most cases the funds are not liquid. While most family offices avoid any type of “risky investment,” they are not on a timeline to invest their funds, and they only do invest when the appropriate opportunities present themselves.

Family offices are different than private equity real estate funds, in that the capital used by private equity funds is institutional. Institutional investors pool their funds in order to purchase securities, real estate, and other investments. They include banks, REITs, pensions, mutual funds and others, and they’re all supposed to achieve a preferred return that is paid to investors and limited partners. Because it’s in their best interest to purchase assets quickly, they don’t have the luxury of waiting for opportunities to come along the same way that family offices do.

Family Offices and Patient Capital

The biggest advantage that a family office has over any other investor or fund is that they don’t have to operate on a timeline. Many family offices that invest in real estate tend to hold the real estate investments for 10 to 15 years, and even longer, and accept no or low cash flow in the immediate term. The expectation is to start receiving more substantial cash flow in the long term, when the asset appreciates and it’s time to refinance, or when the asset is sold, or when income increases in the future. The luxury of having patient capital allows families to take a much longer-term view of their investments, or patiently wait for the right time to invest, thus, helping them create and grow generational wealth. When patient capital invest, it is willing to accept long periods without profit to make a much bigger profit later on, usually riskier and illiquid investments.

Hence, family offices are willing to buy multifamily properties that have bad debt, properties with occupancy levels lower than 90%, and distressed properties. While this is a change from their traditional purchase metrics, they have some good reasons for purchasing these types of riskier assets.

Family offices in the U.S. are focused on multifamily right now for several reasons. First, family offices have multiple sources of income from a wide variety of investments, so they don’t have a need for immediate cash flow. Second, real estate has historically been an excellent investment vehicle to park capital, and in exchange for a higher return later on, they’re willing to forgo any immediate return.

The third reason is that real estate is an excellent investment tool to lower their overall tax burden. Using depreciation and CapEx, family offices are able to offset their income from other sources, which is why many family offices don’t look for the type of investments that generate immediate cash flow.