Real estate investment offers reliable returns over the long term. Well-selected properties tend to increase in value at a rate faster than inflation.
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Investors generate profits by charging rent to commercial or residential tenants and realizing capital gains when selling properties for more than they cost them.
Core Investments
Core real estate investments typically consist of high-quality properties with long-term leases that generate steady income while remaining relatively risk free. They tend to be top-tier buildings in high-demand locations with credit tenants locked into long-term contracts requiring minimal renovation as they’re already fully rented and in great condition.
The low-risk profile of core investments makes it a popular investment category for larger institutions such as pension funds and endowments.
Consider a core investment that has an internal rate return of 6%. After 20 years, this property would generate a capital gain of $5 million; however, its value depends more on market conditions and timing than it does on physical asset itself; making core deals less reliant on future returns than fixed-income securities investments.
Value-Add Investments
Value-add real estate investments involve renovating and improving properties to increase their value, such as adding an ADU, revising service contracts or altering how a building generates income – activities which ultimately can result in increased NOI (net operating income).
Smart investors will look for properties that have rents below market rates or rental rates lower than expected, and then take advantage of the increased NOI by selling or holding on to improve cash flow.
Grower Crowd says that real estate investment can bring significant tax benefits. According to this platform, property investors may claim depreciation over 27.5 years and deduct the interest payments on loans taken out to purchase properties.
Managed Funds
Interested in investing in real estate but don’t want to manage individual properties yourself? Consider investing through a managed fund. These funds invest in a variety of property types, areas and risk/reward profiles to provide greater diversity than REITs or individual property investments.
As you evaluate a real estate fund, be sure to carefully consider the manager’s track record. They should have experience in managing different market conditions and multiple business cycles.
Fees and carried interest are important to consider. In many other asset classes, there are established norms for how fees should charged. However, in real estate the situation can be ambiguous. To ensure transparency to investors you need to make sure that your management team explains its fee structure in full to them and makes it clear to them.
Crowdfunding
Investors can access the real estate market through online real estate crowdfunding with a minimum financial commitment. Platforms like Fundrise, Origin Investments, and RealtyMogul enable investors to pool funds that own real estate assets together into REITs. These REITs may or may not trade publicly. There may be private REIT investment options as well.
Private REITs resemble mutual funds in that they provide the potential for higher returns due to lower operating costs, while at the same time being less volatile due to not trading on an open market.
CrowdStreet and EquityMultiple provide attractive returns for accredited investors willing to commit money for long-term returns. Although these platforms perform minimal due diligence, it’s still a good idea to do your own research before investing in illiquid investments such as CrowdStreet and EquityMultiple. These investments could cause you to lose your entire initial investment. This type of investment should not be the sole source of wealth for a portfolio, but rather a part of it.
