Once you’ve gained a couple of years’ experience in the real estate business, you may start exploring ways to earn passive income through investment. You’ll find many more real estate investment options available today than existed a few years ago—largely thanks to the advancement of internet-based communications. You’ll also find many more ways to mitigate risk.
A couple of generations ago, it was difficult for people who didn’t have a lot of personal wealth to invest in real estate. An investor usually had to own a property outright, which meant a huge capital outlay up-front—not to mention the difficulty of lining up debt on favorable terms. Today, high-net-worth individuals still have the option of simply buying a property, managing it (or having it managed), and collecting the rent. However, several other types of real estate ownership are now popular. The most prominent real estate investment options are real estate investment trusts (REITs) and crowdfunding.
Real estate investment trusts (REITs)
REITs are companies that own and operate a portfolio of commercial real estate, and sometimes real estate debt as well, and finance their operation through the sale of stock in their company—stock that might or might not be publicly traded. They’re vehicles by which investors can, in effect, own real estate without buying an entire property. While there’s considerable variation among REITs as to what they own, how they’re managed, and their overall strategies, they tout themselves as sound investments for several reasons. They generally offer a diversified portfolio, steady dividends, protection against inflation, long-term performance, and transparency. By law, REITs have to pay out at least 90 percent of their taxable income to their stockholders.
Today, an estimated 70 million Americans invest in and own shares of various REITs. Public REITs own and manage an estimated $2 trillion worth of real estate assets. REITs vary widely in terms of their investment strategies. Some are more speculative than others; some are more highly leveraged than others. Structures vary dramatically, too, but in general it’s easy for an investor to understand a REIT’s structure, strategy, and performance.
Some investors prefer buying shares in non-traded REITs, which are less volatile than a REIT with a stock price that fluctuates from day to day. Because they don’t trade on a national securities exchange, non-traded REIT stock can be difficult and expensive to sell, and the up-front fees for buying stock in a non-traded REIT can be high. Still, a sound non-traded REIT might be a wise choice for an investor who’s willing to commit capital for a period of years. Non-traded REITs offer high returns, but they often are highly leveraged.
Real estate crowdfunding
Brandon Jenkins, COO of Washington, D.C.–based Fundrise, suggests crowdfunding as an alternative to direct investment or buying REIT stock. Crowdfunding, he explains, is an online version of syndicated lending: an investment method that has been popular for hundreds of years. It’s a lower-cost alternative to private equity funding, which typically is illiquid and carries a high investment minimum.
Very simply, crowdfunding consists of finding a building or a development project to invest in, and putting together a team of investors, who may or may not know each other. This method has become familiar to people who use Facebook or other social media, usually in charitable situations, such as “Let’s help Mrs. Smith repair her flood-damaged house!” Now, due to relaxations of various federal regulations, online crowdfunding is gaining popularity as a way to invest in a real estate project without making a large financial commitment. Several online crowdfunding platforms currently exist. The most reputable of these curate all proposed investments carefully to ensure that they’re sound; many of them offer the investor various safeguards.
Advantages and drawbacks of these popular real estate investment options
“Online platforms like Fundrise offer the benefits of public market access, but with lower fees,” Jenkins explains. “We’ve leveraged technology and new federal regulations to offer investors the first ever low-fee, diversified commercial real estate investment available directly online to anyone in the United States, no matter their net worth.”
Publicly traded REITs, Jenkins acknowledges, offer the benefits of being traded openly on an exchange, giving investors liquidity. However, this liquidity tends to be priced into the value of the stock itself, resulting in lower relative returns for investors who otherwise would be happy to own the shares for the long term.
The most commonly cited shortcoming of publicly traded REITs, Jenkins says, is that they’re overly correlated to broader market volatility. Their value may fluctuate up or down depending on how the rest of the stock market is doing. This can happen regardless of whether or not anything has actually changed with regard to the underlying properties owned by the REIT.
Non-traded REITs have grown in popularity because of the perceived consistent double-digit dividends paid to investors. However, according to an Investor Bulletin by the Securities and Exchange Commission, up-front fees for a non-traded REITs are often times as much as 15 percent of an individual’s initial investment.
Advice for investors
Eric Bowlin, a real estate investor and advisor based in Dallas, Texas, offers a website that helps investors find, analyze, and buy into their first income-producing properties. He says that what you invest in, and how you invest, depend on your risk tolerance, personality, and investing style.
“Beyond that,” he says, “it’s most important that people invest in a way that they are comfortable. If someone has a strong background in stocks, then publicly traded REITs may be the most comfortable and least risky. A real estate agent or a contractor may think there’s nearly zero risk involved in buying and flipping an individual property, because they already know all the numbers. If you’re making great returns and feel comfortable with the risk, it’s a good investment for you.
“I do think it’s important to become an expert in one area of real estate first, before trying something else. Everybody needs to bring something to the table, and real estate agents can bring market knowledge. Good agents can find great deals and get them under agreement, then partner with a more experienced investor to get the cash or crew to finish the job.”
Bowlin advises beginning investors to place their capital cautiously. He focuses on properties with strong “value-add” potential, since they’ll usually perform well no matter how the overall market is doing. Real estate agents who are investing locally will often find that value-add properties offer better potential than fully stabilized or Class A properties, which tend to appeal more to institutional investors. He also invests in “eREITs” through Fundrise.
The future of real estate investing: eREITs
According to Brandon Jenkins, Fundrise eREIT™ investments are the future of real estate investing. They offer a low minimum investment (typically $1,000), quarterly liquidity, low fees (roughly 1/10th the fees of similar non-traded REITs), and full accountability. They allow people who couldn’t dream of buying a multi-million-dollar building to buy part of that asset, or a portfolio of assets, with a few mouse-clicks.
“The Fundrise eREIT investments are the next evolution in real estate,” he says. “Fundrise eREITs leverage technology and new federal regulations to offer low-fee, diversified commercial real estate investment directly online to anyone in the United States, no matter their net worth.”
Since Fundrise eREITs are privately traded, they’re less liquid than public REITs, Jenkins admits. An investor might have to remain committed as long as the REIT is invested in the assets. However, if your investment style involves holding your assets and enjoying the return, rather than trading for quick profit, these eREITs might be an option worth considering.
Jenkins advises investors to keep in mind that real estate, by its nature, is a long-term growth proposition. When Fundrise chooses properties to include in an eREIT, the company looks for markets with long-term growth potential, and demand for that particular asset. The company looks at real job growth and other demographic indicators, as well as the potential for the individual asset to gain value.
Honing in on the best real estate investment options
Whether you’re buying a property directly, buying REIT stocks, or participating in a crowdfunding venture, Jenkins urges, it’s vital to work with the best real estate companies: the most reputable developers, investors, lenders, and property managers. When exploring real estate investment options, look for companies and individuals who have experienced market downturns. They rarely make bad investments.
Fundrise, Jenkins notes, was born in the wake of the market collapse of 2008, when investors were wary of strong commitments to real estate. He’s still cautious about the future of the market, he says, and believes that real estate pricing is about to peak. Therefore, he concludes, investors will need to look carefully at each deal to ensure that the fundamentals are sound.