Five Most Common Ways To Invest in Real Estate
At Breneman Capital, we believe our investors’ success is our own success. That is why we provide a wealth of insights and resources for you to determine the best possible investment strategies that correspond to your goals and needs.
The best course of action is to begin by answering two basic questions:
Question #1: How active/involved do you want to be in the day-to-day operations and performance of your investment(s)? Would you like your investment(s) to be Active or Passive?
Question #2: Think about the duration for which your equity will be invested and your ability to sell. What are your liquidity needs? Can you manage a 3-10 year investment period, or do you require public market liquidity via stocks?
The following chart categorizes each real estate investment type based on the two questions above:
The list below details the five primary investment types:
Direct Investments / Syndications:
Direct Investments, also known as Syndications, are when a group of individuals or firms aggregate capital for the purpose of investing in real estate with direct ownership in the property.
This is often done with a “Sponsor” or “General Partner” (GP) that acts as the point of contact and handles day-to-day management and operations. In this model, outside investors contribute capital to the partnership in exchange for interest in the entity as “Limited Partners” (LPs).
Cash from operations and capital events (such as sale or refinance) flows through the partnership to the GPs and LPs.
In these partnerships, the sponsor identifies and secures a property they wish to invest in. The opportunity is then presented to potential investors (LPs). The investors can then decide how much capital (if any) they wish to commit to that particular opportunity.
A major benefit to investing in syndications on a deal-by-deal basis is that LP investors may review and have full discretion whether or not to invest in a specific property. If the investor has strong conviction for an opportunity, they can choose to allocate more money towards it. If they do not like the opportunity, they can choose to withhold investing.
Real Estate Funds:
Funds have some similarities to syndications but are ultimately a different investment. The structure is generally the same, but there is an additional layer of ownership; special purpose entities (SPE) are created for each new acquisition, serving to shield the fund from liabilities arising from individual properties.
Funds may either invest alongside other operators (adding an additional layer of ownership), or they may be a sole operator. Limitations and framework on fundraising, deployment of funds, strategy, amounts of leverage, fund life, etc. are predetermined to give investors an understanding for how their money will be invested.
A significant benefit to real estate funds is that investors only need to fund a single investment that will be diversified across a number of different properties the fund acquires.
The downside of investing in a fund is that investors do not have full discretion on a deal-by-deal basis. So long as an opportunity meets the predetermined fund mandate, the sponsor will generally proceed with an investment without full input/disclosure from LP investors.
Non-Traded REITs:
Non-traded REITs are similar to funds. These are a hybrid investment that allow investors to gain diversification across multiple properties with the benefit of liquidity options on a predetermined basis - quarterly, semi-annually, or annually.
Non-traded REITs are a controversial investment to many because the industry has been plagued by incredibly high fees that may significantly dilute investment performance.
It is common for investors to pay a 10% load to enter the non-traded REIT (so only 90 cents of every dollar is actually invested) and then pay high fees while properties are owned. They may also face restrictions and discounted valuations if shares are sold early.
Public Market REITs:
REITs are companies that own, operate, or finance income-producing properties, allowing investors to invest in portfolios of real estate through the purchase of stocks or ETFs.
A significant benefit to investing in REITs is liquidity. Public market REITs are stocks, so they may be traded easily via stock exchanges.
The negative of REITs is that they have a very high correlation to the S&P 500 and feature limited tax benefits. It is common for REITs to trade at discounts to the private market valuations of their underlying assets owned. In addition, investors may be burdened with company overhead costs as a function of their ownership.
By comparison with other real estate investments, REITs generally offer lower returns than private multifamily real estate. This is partly due to limited growth and expansion potential, as REITs must distribute a minimum of 90% of the taxable income to shareholders by law. Investors are then required to pay taxes on such income. REITS also generally own properties long-term with low leverage, which limits return potential.
Active Investing / Investing On Your Own:
Active real estate investing is when an individual or collective group owns and operates a property outright.
This investment type is for investors who demand full control over their property. This will involve doing all the work necessary to source, acquire, finance, manage, and potentially renovate their investment. This is the best option for those seeking to enter the real estate investing industry on a full or part-time basis and avoid paying fees to partners, funds, or REITs.
Be warned that novice or unsophisticated active investors expose themselves to significant risk given their lack of expertise with regard to valuations, underwriting, legal, due diligence, strategy execution, and operations.
Managing a property or portfolio will eventually be a full-time job, and more often than not it should be left to professionals to handle all the issues and aspects comprising a real estate investment.
It is common for active investors to underestimate the time commitment and expertise needed and acquire 1-2 properties before realizing that working through investment professionals is a more ideal fit for them. Syndicators and funds charge fees, but investment performance is typically stronger given the experience, market knowledge, and resources that investment firms possess. In most cases, individuals are better suited investing through Syndicators/Funds/REITs rather than actively investing.
About Breneman Capital
Breneman Capital is a private real estate investment management firm specializing in the multifamily property sector. Breneman Capital employs a deliberate investment approach, leveraging data analytics and proprietary technology to generate superior risk-adjusted returns for investors.
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