Welcome to The Real Estate Venturist. Every other week, this newsletter will give you a behind-the-scenes look at what it’s like to be a real estate entrepreneur. As always, this is not investment advice and merely my opinion.

401(k)s open to real estate

The big guys are coming for my investors. Should I be worried?

I once worked for one of the big guys. That experience shaped much of my real estate investing career. Back then, our investors were well-known pension funds and endowments, both domestic and international. Occasionally, for a unique opportunity, a pool of ultra-high-net-worth individuals might join the capital stack. This all happened through a big Wall Street bank with a wealth management arm. There was no overlap between those investors then and my investors today.

President Trump’s recent executive order is changing that. By allowing alternative investments in 401(k)s, the average investor will get access to real estate and private equity investments. Normally, 401(k)s have a pre-selected menu of investment choices. Is the niche mutual fund on that list? Nope. The investment menu is littered with offerings from big companies like American Funds or BlackRock. When real estate and private equity are added, they’ll come from similar big companies, not from companies like mine.

This is old news

It already happened. Have you heard of BREIT (Blackstone), SREIT (Starwood), or KREST (KKR)? Over the past five to seven years, they have raised billions of dollars at an astonishing pace. Institutional investors infiltrated RIAs, who then sold BREIT/SREIT/KREST to their high-net-worth clients. The largest RIAs went a step further. Instead of selling their clients on name-brand non-traded REITs, they created their own real estate funds. This way, they could keep more fees in-house instead of letting Blackstone cash in. That was even worse for companies like mine, because these funds targeted the exact same high-net-worth investors we do.

For the big guys, including RIAs, it’s all about fees and assets under management (AUM). They need AUM to grow so their fee base grows, and, in turn, their stock price grows. It’s an insatiable cycle that never ends. Individual investors are simply a new source of AUM for them to tap.

I’d be lying if I said I didn’t want to grow my AUM, too. I do. But the barriers to creating an institutional-sized fund with pensions and endowments as investors are exceedingly high, as is gaining distribution through 401(k) plan sponsors and elite RIAs. My AUM has to grow by doing good, if not great, deals. The big guys don’t have to play by the same rules. If your wealth manager at Goldman Sachs underperforms the market, do you leave? If Blackstone underperforms with BREIT, do you fire your RIA? But if your advisor suggests an unknown real estate fund and it struggles, that advisor is far more at risk of losing you as a client.

Better investment returns

I believe better investment returns are found with groups focused on a particular niche. In my case, it’s value-add apartment investments. We’ve had tremendous success in the San Francisco Bay Area, especially in Silicon Valley. It’s where we started Calvera Partners and where we have our deepest relationships with brokers, vendors, and investors. While we’ve made successful investments in other markets, nothing beats homegrown knowledge.

Focusing on the Bay Area today makes sense for so many reasons. Rents are growing faster than the national average. Tech jobs are coming back, both through in-person requirements and new AI-related jobs. There’s a chronic lack of new apartment supply, driven by fierce neighborhood opposition. San Francisco itself is gaining momentum under new mayoral leadership, and how well the city performs has a ripple effect on the entire region. On top of that, many institutional owners (i.e., the big guys) can’t get past the fact that most of the apartment stock was built in the 1960s and 1970s. They see it as too old. This creates an environment with less competition. For us, that is a perfect recipe for better investment returns.

This is what we and our peers must hang our hats on: a niche market focus that drives above market returns. That is how we differentiate ourselves. The challenge is getting the word out to new investors. While we don’t expect help from 401(k) sponsors or the elite RIAs, we believe that if we deliver for our current investors—and there are hundreds—more will follow.