Based on your results from our Real Estate Investor Quiz, we believe Some Funds, Real Estate Investment Trusts, and Possibly Syndications may be the right investment options for you.
Passive investing in real estate is a great way to reap the benefits of owning property without all of the headaches that actively managing your properties can entail.
A real estate fund is a type of passive investing that involves pooling different projects and raising funds from investors. An easy way to see a fund is as separate investments into different syndications. Because not every project will perform the same, funds are generally diversified to offset risk.
To understand the main differences between a REIT and a real estate fund, read this Investopedia article.
One advantage of investing in a real estate fund over directly buying a rental property is that funds generally offer more diversification. Unlike a single property, funds can purchase a variety of asset classes over a wide geographic area. Funds are also not tied to a single investing strategy. Learn more about diversification in this video, and subscribe to our YouTube channel for more content.
Pros and Cons of Funds
Funds are a type of passive investing that don’t require any work on the part of the investor. However, there are some tradeoffs to this type of investment.
Pros of Funds:
- This is a type of passive investing and doesn’t require the investor to do any of the work on the project.
- Because there are multiple projects, funds offer diversification.
- Since so many investors are contributing funds, General Partners are generally able to get better terms than an individual investor would get.
Cons of Funds:
- You are committing your money over a period of time, and you typically don’t get it back until the project is complete.
- You usually need to be an accredited investor: either making $200K alone a year or a married couple making $300K; or, you have more than $1MM to invest, not including your primary residence.
Real Estate Investment Trust
A Real Estate Investment Trust (REIT) is a company that owns and typically operates income-producing real estate or related assets. REITs allow individuals to invest in large-scale, income-producing real estate without having to purchase the real estate themselves. Instead, investors receive a share of the income produced by the property.
REITs are the most common type of passive real estate investing. There are over 1000 REITs to choose from, and there’s one for every type of asset class: self-storage, office space, apartment buildings, and more. Get an in-depth look at different kinds of REITs in this Investopedia article.
Financial services firm Morningstar found that optimal investment portfolios allocate between 4%-13% in REITs. Read more about their findings here.
REIT Pros and Cons
Pros of REITs:
- Some powerful features of REITs are their liquidity, which allow investors to sell on short notice, and that investors usually don’t need to be accredited, just able to put cash into the trust.
- Over the past 20 years, the stock market, on average, has annually increased 8% per year. Meanwhile, REITs have gone up 13%.
Cons of REITs:
- Because REITs don’t require investors to be accredited, they tend to make less money compared to other passive investing options.
- Dividends of REITs are taxed as regular income.
In a syndication, a General Partner (GP) is responsible for picking out a real estate project and doing all of the necessary work to complete the project. These are big-scale projects, such as purchasing an apartment building and creating value-add.
The majority of the cash for the project comes from Limited Partners (LPs). They write the check but don’t have to guarantee the loan or manage the project.
At the end of the project, everyone gets their capital back in addition to the proration of the profit. Because they have less responsibility, LPs get paid less than the GP. Learn more about how investors get paid in both syndications and funds in this article.
Pros and Cons of Syndications
Syndications are a type of passive investing that don’t require any work on the part of the investor. However, there are some tradeoffs to this type of investment.
Pros of Syndications
- As an LP, you are not guaranteeing the loan, nor are you doing any of the work on the project. You simply write a check, and if the project is successful, receive a share of the profits.
- Usually, GPs are incentivized to ensure the project runs smoothly and generates solid returns.
- Because your money isn’t liquid, you will generally see greater returns to offset the risk.
Cons of Syndications
- It can be difficult to find a syndicator or know the right questions to ask. Listen to this BiggerPockets podcast to find out what you need to ask before investing.
- Your money is often committed for three to five years, and you typically can’t get it back until the project is complete.
- You generally need to be an accredited investor: either making $200K alone a year or a married couple making $300K; or, you have more than $1MM to invest, not including your primary residence.
Learn more about funds in this Ironton Capital webinar.
Want to see how to unlock your home’s equity so you can invest in funds, REITs, or syndications? Our Property Llama software will allow you to run different scenarios to figure out the best way to build your portfolio. Sign up for your free account to get started.