The Different Ways You Can Invest in Real Estate

Many people aspire to invest in and own real estate as they know it’s a major creator of multi-generational wealth, thanks to its annual income returns & the prospects of capital growth. There are a variety of ways in which investors may participate in the sector, so let's have a look at four of the most favored ways in which real estate investments may be accomplished:

Syndication or Direct Investment (Private Equity)

Syndication or Direct Investment (also called “Private Equity Investment”) into real estate is when a group of individuals or firms assemble and aggregate capital for the purpose of investing in the direct ownership of a property.

Third party investors contribute capital into a limited partnership in exchange for an interest in the entity, becoming “Limited Partners” (“LP”). Such investment is often undertaken with a “Sponsor” or “General Partner” (“GP”) which/who acts as a co-ordinator or point of contact and handles the day-to-day management and operations of the invested property.

Cashflow from the property’s operations and from any capital events (such as a sale or refinancing) flows through the partnership to the GPs and LPs, and is often referred to as a “waterfall”.

Key advantages: LPs are passive investors (stakeholders) in the owning entity and are protected from its liabilities. They are not required to sign for loan repayments or other relevant financial repayment guarantees, and do not have any responsibility for how the property is managed or other key decisions regarding the investment

GPs sign guarantees and often take on additional legal and financial exposure to execute investment opportunities. As a result, the GP’s compensation will be heavily weighted towards the performance of the property, incentivizing them to source the best possible opportunities and effectively execute their investment strategy--often with very attractive investment returns being achieved.

Syndicated private real estate investment offers unique tax advantages and estate planning benefits and also offers the most autonomy, allowing investors the ability to choose the type of investments as they'd like to invest in.

Disadvantages: LPs do not usually have decision-making authority with regard to their investments, especially when it comes to sale and operational matters. Also, in a structure with multiple LPs and a GP, there may be differences in financial interests.

Furthermore, such investments are relatively illiquid, and this can be seen as a positive or a negative depending on investor preferences.

Real Estate Funds (Private Equity/Private Debt)

Real Estate Funds are similar to syndications in some ways but ultimately are a different type of investment. The structure is essentially the same, but there is an additional layer of ownership. That is, special purpose entities or special purpose vehicles (“SPE” or “SPV”) are created for each new acquisition, serving to protect the fund from any liabilities arising from individual properties.

Funds can either invest together with other operators (again, adding an additional layer of ownership), or they may be the sole investor or operator. Investors will know in advance how their capital will be invested as there will be pre-determined limitations on, and a legal framework for fundraising, deployment of funds, amounts of leverage, fund life, etc.

Advantages: investors can benefit from asset diversification as, usually, a fund’s returns are derived from a portfolio of properties. Investing in a diversified, well-capitalized fund with a trusted sponsor can streamline the deployment of an investor’s capital which mitigates the risk of being overweight in one particular property sector.

Disadvantages: even if there are properties which a LP would not have chosen or did not want to invest in, in reality, they are invested in every property a fund acquires. By their very nature, funds need to have all-encompassing strategies, with the goal of the fund management team to secure above average returns from the broader portfolio. Therefore, LPs have to believe in the sponsor and the overriding strategy of their chosen fund.

Investors may also have to pay a double incentive fee when investing with funds which invest in real estate with other operators/sponsors

Real Estate Investment Trusts “REITs” (Public Equity)

REITs are entities which own, operate or finance income-producing properties, allowing investors to invest in mixed or single-sector portfolios of real estate through the purchase of stocks or ETFs.

Advantages: REITs are a form of passive real estate investment which requires no direct management of property, and is not tied to one specific piece of real estate. Many REITs are traded on major stock exchanges and, as such, are relatively liquid in nature. They are, typically, large groupings of funds (average market cap of a REIT being $4 billion) and, for efficiency, spread their regulatory and operational costs over a large portfolio of properties.

Equity REITs tend to invest in higher-quality properties, in better locations, for longer periods of time and these include prime offices or grade A shopping centers.

The combination of having a large, diversified portfolio and lower permissible leverage limits the potential downside.

Disadvantages: the corporate overhead and administrative expenses incurred by the REIT are allocated to shareholders.

By comparison with other real estate investments, REITs generally offer less-attractive risk adjusted returns than investing in private multi-family real estate. This may be, partly, as growth and expansion potential may be limited as, by law, REITs must distribute a minimum of 90% of the taxable income to shareholders, who are then liable to pay taxes on such income.

Furthermore, REITs have high correlation to the performance of the S&P 500, limited tax benefits, and returns are predominantly from capital appreciation.

Investors have no input with regard to individual investments made or the day-to-day operations of the property or portfolio.

Active Investing or Direct Ownership (“Private Equity”)

Active real estate investing is when an individual or collective group owns and operates a property outright.

Advantages: the investor has complete property selection and decision-making authority, and receives all profits if the property performs well.

Disadvantages: all responsibilities for performance rests on the investor and, unless already experienced, they will face a steep learning curve.

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 can be a full-time job and, more often than not, it should be left to professionals to deal with all issues and aspects involved in the different stages of a real estate investment project.

Breneman Capital

Breneman Capital is a data-driven multifamily investment firm pushing the real estate industry into the future with a modern approach to direct real estate investments.

We focus on providing our investors with the best risk-adjusted investment opportunities in carefully selected markets across the U.S., researched and underwritten with extreme detail from our headquarters in Chicago.

All your multifamily needs are best met with Breneman Capital at your side.

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