There are many ways to invest in real estate without directly purchasing property. Many investors will want to participate in this asset class without the headaches that come with owning and maintaining property, dealing with tenants and developers, enduring construction delays, and facing regulatory risks concerning local, state, and national interests. Purchasing real estate for rental income entails understanding the current and potential market of the area, renting the property, maintaining the property, and aligning expenses like mortgage and property improvement with rental income. This is typically a very hands-on investment process in comparison to investing in stocks or bonds.
Real estate by its nature requires expertise in property maintenance and the implementation of a strategic investment goal. These goals can be very diverse – a quick flip of the asset by investing in exterior and interior improvements, a long-term investment in the development of commercial properties, and the investment in office space in developing markets can all be strategic investment goals. In order for investors to participate in these different real estate opportunities, various financial vehicles and structures exist. For investors that lack the purchasing power to develop shopping malls in the mid-west or buy farmland in China, structures are set up to pool investor capital and deploy these funds into different real estate strategies. This opens up opportunities for individuals to invest in real estate without actually purchasing property. Below are some vehicles and strategies investors can utilize to allocate to real estate.
(1) REIT’s: Real estate investment trusts are companies that own many different forms of real estate. They can be categorized by different investment strategies, but all REIT’s allow investors to buy and sell them in the form of securities, similar to how mutual funds allow investors to buy baskets of public equities. REIT’s must pay out at least 90% of taxable income in the form of dividends to shareholders. Depending on the structure, REIT’s can be traded on a public exchange or set up as a private investment.
(2) Private Equity Real Estate Funds: These investments typically pool investment capital from institutional and qualified investors. A management team will deploy assets to take advantage of different real estate investment strategies. In this way investors can participate in the real estate asset class while taking advantage of management team expertise and purchasing power. In exchange for the manager’s work, investors are charged a management fee as a percentage of assets and a performance fee as a percentage of eventual profits.
(3) Real Estate Online Investing: Digital platforms afford investors the ability to access real estate investment opportunities online. These opportunities are generally only available to accredited investors. Certain platforms allow direct access into the real estate opportunity so that investors can bypass fees associated with having their investments pass through middlemen such as brokers and fund managers. Fundrise, Realty Mogul, and RealtyShares are just some of the leading real estate online investment platforms.
(4) Direct Investment: Direct investment into a real estate opportunity has its advantages in that fees associated with money going through middlemen are mitigated. However, the expertise of professional real estate money managers can offer advantages and hedge against significant risks inherent in these investments. These investments are similar to investing in private companies, where restrictions are placed on retail investor participation. The organization of these real estate projects as private entities requires that investors meet accreditation standards.
(5) Public Equity: Retail investors can purchase public equity from companies that specialize in real estate strategies. For example, China HGS (ticker: HGSH) traded on NASDAQ is a Chinese-based company which, through its wholly-owned subsidiary, develops large-scale and high-quality commercial and residential projects in China. The ProShares UltraShort Real Estate fund (ticker: SRS) seeks daily investment results corresponding to the inverse of the Dow Jones U.S. Real Estate Index, which is the measurement of performance of the real estate sector of the US equity market. Through public equity, investors can invest in strategies directly related to different real estate opportunities.
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