How to Invest in Real Estate - Investment Strategies
Real estate has long been considered an alternative investment vehicle and only recently has it become more mainstream. By way of example, an estimated 87% of all public sector pension funds and 73% of all private sector pension funds now invest some portion of their portfolios in real estate. Pension, endowment, and foundation funds collectively control over $9 trillion in total assets, with nearly $800 billion invested in real estate (source: Preqin – Pension Funds Investing in Real Estate, September 2016).
For the last 35+ years, individuals in Germany have been able to invest alongside Jamestown in private investment offerings. In the US, Jamestown has offered real estate investment opportunities only to institutional investors investing large sums of money. With recent regulatory changes, private real estate investment opportunities are now available to Americans in nearly every income bracket.
When invested in directly, real estate is a highly illiquid asset class, meaning that property cannot be quickly bought or sold in the same way other securities, like stocks, can be. This means real estate investment is a long-term commitment—one that not everyone is able to or interested in making. It’s also what makes it an opportunity for those whose financial goals are aligned with the longer hold period requirements of a real estate investment.
There are many ways to invest in real estate. We’ll look at the landscape of common real estate investment practices through two categories: active and passive. Read on to learn more.
How to Invest in Real Estate – Common Strategies
For a first-time investor, buying income-generating investment real estate can seem daunting. Where should you invest? How? With whom? In what property type? Will you manage the property yourself, or will you hire a third party to take on day-to-day operations? These are just a few of the factors to consider.
When trying to determine which strategy is suitable for you, a good place to start is to consider whether you plan to be an active or passive real estate investor. The main difference is the effort, time, and energy needed for active investing relative to passive investing, where you defer management to an experienced manager.
Active Real Estate Investing Strategies
Active real estate strategies require the investor to be active in both the day-to-day and strategic decisions of the real estate investment.
The responsibilities of an active real estate investor range from identifying and evaluating potential opportunities to overseeing the day-to-day operations of the real estate deal, which include site acquisition, financing, construction, leasing, and eventually, disposition. Of course, most active investors will have a team of people assisting them with these activities (e.g., a property manager, general contractor, or a leasing broker) – but the ultimate authority and decision-making falls squarely on the active investor’s shoulders.
The main benefit of active investing is control. An active investor selects which properties to buy based on their preferences for type, location, budget, and other factors.
Passive Real Estate Investing Strategies
Passive real estate investing strategies allow you to invest in real estate, but through a manager who handles operations and is responsible for adding value over time.
Invest in REITs
Real estate investment trusts, or REITs, are a great way to passively invest in commercial real estate for those who have limited capital and/or the need to preserve liquidity. A REIT is an entity that combines the capital of many investors to manage, buy, or sell properties within a portfolio of real estate investments under professional management. REITs can be publicly traded on a stock exchange or private (not traded on an exchange). Because publicly traded REITs are traded on stock exchanges they offer investors liquidity – investors can choose when they want to divest. Non-traded REITs are offered directly from issuers or through financial intermediaries and are generally not available to be bought or sold on secondary markets, although some limited liquidity may be available from the issuer through redemption plans or over-the-counter (“OTC”) trading which occurs outside of stock exchanges.
One downside of investing in a REIT is the lack of control you have over the investment portfolio, and this is the case for all passive investment strategies. Many REITs provide limited diversity: they often specialize in a certain product type (e.g., retail, multifamily, office) or geography. As long as the fund is investing within the predefined parameters, you will have no say in how investments are made, managed, and operated over time.
Another downside of investing in REITs is that publicly-traded REITs, in particular, are more heavily correlated with the ebbs and flows of the stock market. This can cause REIT values to become dislocated from the value of real estate and more closely correlated to broader market conditions – a disconnect that may or may not be warranted.
Real Estate Syndication
Real estate syndication is a term used to describe the pooling of investor funds to invest in either debt or equity needed to finance a commercial real estate deal. Most real estate syndications are structured in a General Partner (GP)/Limited Partner (LP) manner, in which the general partner (the “sponsor”) oversees the day-to-day operations of the real estate deal, ranging from site acquisition to financing, from construction to leasing vacant space, and eventually, disposition. The other investors, or limited partners, take a backseat role in the process.
Anyone considering investing in a real estate syndication (sometimes referred to as a real estate fund), will want to evaluate the sponsor before making a capital contribution. Be sure the sponsor is well versed in the product type and has a proven track record. Investors should read through the offering memoranda with a fine-tooth comb to understand the fee structure (including incentive fees) and when distributions will be made. With syndications, not all sponsors are created equally. Investors should be certain they are working with a stable, reliable partner.
Digital Investment Platforms
Over the last several years, real estate investment opportunities have emerged as a popular form of passive real estate investing through online platforms (sometimes referred to as real estate crowdfunding). Similar to a syndication or other real estate funds, this process connects individual investors to what have historically been investment opportunities only in the private commercial real estate market. Depending on the fund, the minimum investment can be very low or very high, but in many cases, digital platforms are much more accessible than traditional real estate syndication.
There are many benefits to engaging with platforms like these. First, it opens the doors to institutional-quality real estate investments that many investors would never have access to if investing on their own. For example, consider a creative office campus in Atlanta such as Southern Dairies at Ponce City Market. With a multi-million-dollar purchase price and an active tenant roll, most investors would not have the capital, operational capacity, or experience to invest in a project of its scale. Technology-driven fundraising opens the doors to these opportunities by allowing many investors to contribute a smaller amount of capital to collectively raise the equity or debt needed for the project to be acquired. Of course, you’ll want to do the same detailed evaluation on the sponsor behind the investment opportunity that you’d do if investing in a traditional real estate syndication or fund.
There are many ways for individuals with varying levels of experience, risk tolerance, and income to invest in commercial real estate. Even those with years of investing experience will often invest passively in various real estate projects as a means of diversifying their portfolios.
That said, we cannot overstate the importance of doing your homework on an investment opportunity before making capital commitments. Real estate investing is different from investing in stocks, bonds, or other securities. It’s a highly illiquid asset class. With few exceptions (e.g., buying public REIT shares), when you invest, you’re making a long-term commitment. You want to know that the company you’re entrusting with your capital is adept at executing the investment’s business plan because once you make the commitment, your capital could be tied up for years to come.
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Posted by Jamestown Invest
Jamestown Invest is a digital platform that connects investors with rigorously-vetted, institutional-quality real estate. Invest alongside a well-capitalized, stable, and reliable manager with $12.1 billion of assets under management worldwide on behalf of more than 80,000 investors across 31 realized funds (as of December 31, 2020).