Overview 

Investing with Neutral provides financial advisors with an innovative strategy to diversify clients' portfolios beyond traditional methods. By partnering with Neutral, advisors can unlock increased returns, capitalize on tax advantages, and enhance portfolio resilience, offering a fresh approach to asset management. Additionally, this approach allows advisors to build stronger client relationships by moving conversations beyond intangible assets. Investing in real estate allows advisors to direct clients' funds into local infrastructure, allowing them to invest in something tangible and meaningful.

‍

Diversification

Diversification is a fundamental strategy in wealth management, mitigating unsystematic risk without compromising potential returns. We've pioneered a pathway for financial advisors to navigate their clients' investments toward real estate development projects, historically an inaccessible asset class for most retail investors. This allows wealth advisors to have non-correlated risks with the stock market. 

Real estate's intrinsic value, anchored in non-financial assets, offers a unique advantage: infrequent pricing. While stocks, bonds, and real estate investment trusts (REITs) are subject to instantaneous repricing, direct real estate investments like Neutral provide a haven of stability, largely insulated from short-term market volatility and emotion-based myopic selling due to market conditions. Economic factors governing the real estate sector create a natural buffer against sudden, drastic value erosion. Multifamily real estate, specifically, is intrinsically tied to the lasting demand for housing in desirable locations, in which we ensure our investments are located through our rigorous market selection criteria (read more here). It is unlikely that a sudden lack of demand from such asset class would occur abruptly. Nevertheless, thoughtful timing remains crucial in realizing optimal returns upon property sale, and real estate cycles will  influence the decision of when to sell an asset. It is critical for an advisor to understand an investor's time horizon as real estate is a longer-term investment, and typically, we hold projects anywhere from 5 to 10 years. Our five key factors for why direct real estate investing is an invaluable tool for an investor portfolio are below: 

Non-Correlation:

‍Real estate often exhibits a low or negative correlation with traditional asset classes like stocks and bonds. Therefore, when the stock market becomes bearish, multifamily real estate typically remains resilient or appreciates, countering publicly traded stock, bond, and REIT portfolio swings. When public markets underperform, the non-correlation of private real estate investments can help balance the total investment returns out.

Inflation Hedge:‍

Historically, multifamily real estate has tended to keep pace with, or even outpace, inflation. Residential rental income and property values can rise in tandem with the cost of living, preserving purchasing power over time, and price-finding adjustments can mirror inflation rates year-over-year due to annual lease renewals, unlike other real estate asset classes like office. For example, from 2021 to 2023 where we saw unprecedented inflation of 17.7% (Srinivasan 2024), multifamily rents rose 30.4% in the same period in Madison, WI (Reynaga 2023). The ability to reprice rental rates yearly helps hedge against inflation. 

Long-Term Appreciation:

Development real estate projects offer the opportunity to capitalize on long-term appreciation. By maximizing a property’s income, stabilized real estate properties are typically sought out by institutional investors, private equity firms, family offices, REITs, sovereign wealth funds, pension funds, high-net-worth individuals, and real estate funds for their consistent income, ability to leverage, and tax benefits.

Potential for Higher Returns:

Private real estate investments can offer attractive yield potential and are unburdened by the constraints of public markets that REITs are bound by. Still, wealth advisors should consider the risks of private real estate investment for their clients and allocate accordingly.  

Portfolio Diversification Beyond Public Markets:

Including private real estate into your investment portfolio adds a layer of unattainable diversification through publicly traded assets alone.

In summary, incorporating real estate development projects into investment portfolios offers a strategic avenue for portfolio diversification, particularly by mitigating unsystematic risk and providing a hedge against market volatility. Real estate’s intrinsic value, stability, and potential for long-term appreciation make it an appealing asset class for institutional investors and wealth managers alike. The non-correlation with traditional asset classes, protection against inflation, and opportunity for higher returns underscore the importance of private real estate investments as a key component of a well-rounded investment strategy. Wealth advisors, by navigating these opportunities, can enhance their clients' portfolios with assets that offer both stability and growth potential, aligning with long-term financial goals.

‍

Client Engagement

As Eric Heiting highlighted in the webinar, Neutral's direct real estate investments present a unique and valuable opportunity for wealth advisors to increase client engagement in contrast to public investments like stocks, where portfolio fluctuations are predominantly driven by macro events, Neutral's direct real estate investments offer a tangible ability to updates clients with project information every quarter. We have a proactive approach to quarterly updates that give advisors substantial details on where the project is from a financial, construction, design, lease-up, and sale perspective to share with clients. This fosters meaningful conversations beyond mere stock market performance. Neutral's direct real estate investments transcend the abstract nature of traditional asset classes, offering a more affluent, engaging experience for wealth advisors and their clients, ultimately leading to more informed and fulfilling investment experiences. Lastly, the unique opportunity for investors to experience the amenities and short-term stays at the investment site adds another layer of connection to their investments.

‍

Timeline

Investors who invest in fixed income or withdraw gains from stocks reduce the benefits of compounding growth. In real estate investing, hold periods are unique to each project but usually range from three to six years. Ideally, investors’ capital remains in the project for its entire duration. The project's time span varies depending on the size of the project and factors regarding development, stabilization, and economic conditions that maximize returns for investors. Unlike traditional real estate investments, Neutral offers potential liquidity every quarter. Our Secondary Market matches buyers and sellers of our projects. This revolutionary exchange allows attractive opportunities to value investors while sellers get unprecedented access to potential liquidity. New opportunities are available every quarter. With fresh opportunities emerging every quarter, our platform ensures a dynamic marketplace for those seeking sustainable investment options. 

‍

Charles Schwab Integration

Introduction 

We have created a frictionless process for wealth advisors to invest their clients’ money into our equity positions. While we want to grow your client’s wealth, we don’t want financial advisors to reduce their AUM by referring our product to your client base. 

The Edison project is available on the Charles Schwab platform through an SSID number, allowing advisors to keep their clients' money under their management and always visible to investors.

Process  

To invest in our projects, clients must complete four essential forms: 

1. Subscription Agreement, 
2. Suitability Questionnaire,
3. Accredited Investor Verification Form; and 
4. Schwab Custody Letter of Authorization form.

Our team uses these forms to verify that investors meet the qualifications required by the U.S. Securities and Exchange Commission (SEC) in order to invest in our projects, similar to any other real estate syndication. Charles Schwab requires a ‘Custody Letter of Authorization’ form completed by both the wealth advisor and the client to all Charles Schwab to be the custodian of the investment and allow the client to view the investment in their Charles Schwab investment account managed by the wealth advisor. Our team must sign off on accepting the subscription agreements and verify with Charles Schwab that the documents are in good order. Furthermore, wealth advisors and clients should review the private placement memorandum (PPM) before investing in the project. 

For clients and wealth advisors, all signed documents should be submitted via Schwab Service Request (Schwab Advisor Center), with the Topic as Alternative Investment and the subtopic as Purchase/Capital Call. Be sure to include the client’s Schwab account number and their name and reference Schwab SSID # 99978785 for ‘The Edison Project LLC.’

Lastly, once the documents have been completed and submitted via Schwab Service Request (Schwab Advisor Center), Schwab will initiate the fund transfer to The Edison Project LLC. Once Neutral confirms with Schwab the effective date, funds receipt date, and all documentation is in good order, the investment is executed, and the position should be in the client's Schwab account. 

IRA Investments 

For investments under an IRA, the process description above applies. Still, the wealth advisor should list the Schwab Tax ID number as 94-1737782, and the investor’s name should be formatted as ‘Charles Schwab & Co. Inc. as custodian for (Investor Name) IRA.’ For other accounts, use ‘Charles Schwab & Co. Inc. FBO (Investor Name)’ and the investor’s social security number.

‍

Resources 

Tax Benefits  

Real estate investments offer unique tax benefits, making them more attractive than other investment types. These advantages include depreciation, which increases cash flows early in the investment, a step-up basis that can eliminate capital gains taxes upon the owner's death, and tax deferral opportunities through 1031 exchanges. Recent sustainable development projects also qualify for new tax incentives under the Inflation Reduction Act, further enhancing returns. Investors can capitalize on various tax credits and deductions, making real estate an advantageous option for both financial growth and strategic tax planning. If you want to read more on tax benefits, please read our tax benefits white paper.

Market Criteria 

Neutral focuses on creating high-quality, sustainable housing in attractive markets by developing properties that meet rigorous sustainability standards like Passive House and LEED Certification. Our economic approach ensures financial viability by targeting markets with strong renter populations, job growth, and rising housing costs, making renting a more attractive option. Neutral also carefully selects locations based on economic, geographic, and social factors, ensuring easy access to daily needs and amenities. Our developments prioritize sustainability, as seen in projects like The Edison, which utilizes geothermal cooling and district heating systems. If you’re interested in reading more on our market analysis, please read our stringent market criteria white paper.

Risk Mitigation

Our team is dedicated to mitigating risk at every stage of the real estate development process, from pre-development through construction and management. We conduct comprehensive market research to assess economic viability, site constraints, and design factors, ensuring informed investment decisions. Partnering with industry leaders, we leverage sustainable materials like mass timber and maintain rigorous financial models to ensure critical metrics such as Yield on Cost and Internal Rate of Return are sufficient. By optimizing tax strategies and managing interest rate risks, we ensure that our projects meet the highest standards of quality and profitability. Our commitment to execution regarding all facets of the development, combined with strategic partnerships, maximizes the value of each investment. If you’re interested in reading more about our approach to risk mitigation, please read our risk mitigation white paper.

‍

Works Cited

Reynaga, Jenny. “Madison Year-over-Year Rents Rose Highest in the Nation, Study Finds.” Madison Year-over-Year Rents Rose Highest in the Nation, Study Finds - The 

Daily Cardinal, 5 Apr. 2023, www.dailycardinal.com/article/2023/04/madison-year-over-year-rents-rose-highest-in-the-nation-study-finds#:~:text=As%20of%20March%202023%2C%20a,an%20average%20rate%20of%201.1%25. 

Srinivasan, Hiranmayi. “U.S. Inflation Rate by Year: 1929 to 2024.” Investopedia, Investopedia, 31 July 2024, www.investopedia.com/inflation-rate-by-year-7253832#:~:text=In%202023%2C%20the%20average%20rate,of%20inflation%20was%201.2%25.7.