Retail v's Wholesale Investing (Retail Investor v's "Sophisticated" Investor)

There are a lot of definitions that can be found online about these terms.

For a better understanding, I suggest you do an internet search. Once you have done that, and understood the differences, then you can apply my simple definition...

The more wealthy you are, the larger lump sums that you are able to invest, and in turn, the larger lump sums open up greater opportunities to make much higher returns on your money than those offered to low value investors.

As an example, your typicaal retail investors will buy shares, ETFs etc from the retail market as listed investments on the ASX. They may invest hundreds or even thousands of dollars per transaction in buying their investments.

However, a wholesale investor will have much bigger opportunities made available to them because they would be investing usually a minimum of $100,000 per transaction (often much, much more). Such investors will buy a property either on ther own or as part of an investment group in an unlisted trust. Their returns are much higher, and they typically would expect an internal rate of return of 20% or more.

I have tried both, and have can tell you I prefer the wholesale investment model, as well as some property investments also. Let me explain....

My aim for the last 25 years, was to build a portfolio of investments that generated enough passive income so I could retire whenever I decided to do so and NOT have to wait for the Age Pension. The thought of my wife and I trying to exist on a combined $41,000 per year (the current Age pension) in 2023 is a completly impossible in my mind.

As such, we went to work to figure out what we needed to achieve to do this.

I decided on property investments, which not only generated passive income for reinvestment, but also unrealised compounding capital gains! If you haven't already done so read the April 21 2023 lesson before continuing this lesson.

If you have now read the April 23 lesson, and understand what was happening with regard compounding of the properties at an average of 8% growth, then you may understand what would hapen to your capital growth over time if you could get say 13%pa growth! That is what can happen when you are a wholesale investor!

Let's take a simple example: an investment of $1,000,000 is made by two people, Joe and Harry.

Joe buys a factory unit as a retail investor, on his own for $1,000,000.

Harry is a wholesale investor, and as such, invests $1,000,000 in an unlisted trust that is purchasing two buildings for $80,000,000. Harry is part of a group of investors comprising of individual wholesale investors as well as instituional investors (superannuation funds, Investment funds etc). Wholesale investments look for exceptional opportunities in the marketplace. This particular one is an actual sale I have taken part in. It was a distressed fire sale, and the two properties have a replacement value of $120,000,000 and were valued at $132,000,000 in 2022.

Joe's investment is a typical retail property investment with average annual growth of 8%pa and a yeild of about 4%.

Harry's is a typical wholesale property investment with an average annual growth rate of 13% and a yield of 8.25%

Here are the numbers:

Joe's Capital Joe's Income Harry's Capital Joe's Income

After 1 year $1,080,000 $40,000pa $1,130,000 $82,500pa

After 2 years $1,166,400 $40,000pa $1,276,900 $82,500pa

After 3 years $1,259,712 $40,000pa $1,442,897 $82,500pa

After 4 years $1,360,489 $40,000pa $1,630,474 $82,500pa

After 5 years $1,469,328 $40,000pa $1,842,436 $82,000pa

As you can see, Harry has made an unrealised capital gain of $842,436 compared to Joe's capital gain of $469,328. Harry has also earned $412,500 in rental returns (yield) compared to Joe's return of $200,000.

The difference between these two investments is $585,610 over a 5 year term, and this is based on the same initial investment amount, the same time frame and same investment sector - with the only difference being how it was invested.

When it comes to generating passive income, we all start the same way but we all take different paths and finish differently.

Step 1 - Save your money to build an amount to invest

Step 2 - Invest in retail assets such as property, shares etc.

Step 3 - Repeat Steps 1 and 2 until you enough assets to become a wholesale investor

Step 4 - Begin investing in wise wholesale investments