Diversification is one of the most popular buzzwords around investing. Everywhere you look, you are encouraged to spread your money across more asset classes than just large cap equities or even equities in general. Outside of equities and fixed income, real estate provides a great opportunity for investors to diversify their portfolios across more than just the two largest asset classes. Here are a few ways you, as an investor, can be involved in real estate.
Real Estate Investment Trusts (REITs)
A real estate investment trust is an opportunity to own a piece of real estate without directly owning any physical property. REITs can be either publicly listed or traded privately, and they often show value through paying dividends. They are seen as mutual funds of real estate, representing companies that hold a diversified portfolio of properties covering various geographic regions. REITs have extremely low barriers to entry, with little to no minimum initial investments and zero personal time or labor commitment.
Example of REITs: Purchasing shares of a publicly traded REIT and earning potential dividends.
Direct Purchases of Rental Properties
Buying a single or multi-family property, a warehouse, or a mall would fall into this category. This type of investment has a much higher barrier to entry because it requires up front capital and monthly payments. Additionally, it requires countless hours of labor and a thorough understanding of property management. To avoid the labor and expertise commitment, owners often hire experienced property managers in return for a percent of rental income.
Examples of direct purchasing: Buying a second home to rent out, purchasing a mall and renting space to storefronts.
Co-investing in real estate is an opportunity for investors to gain exposure to the asset class, with a variety of options to suit the buyers’ unique needs. It allows for a sort of hybrid investment model between direct purchasing and REITs, where you do not have to take on a new personal loan and come up with the entire down and monthly payments, but you still often own a larger piece of a small number of properties.
Example of co-investing: Buying property with partners and sharing costs of acquisition and operation, as well as sharing profits and losses.
Private Fund Investing
Like private equity investment funds, many groups offer private funds that invest strictly in real estate. This is similar to a REIT but does not track the stock market as closely and is not publicly traded. Private fund investing allows you to diversify your real estate portfolio by spreading your investment across multiple locations, real estate asset classes, and other variables that affect investment performance. These funds often take management fees, just like private equity funds, to coordinate and manage the invested capital.
Example of private fund investing: A general partner raises $300 million to invest in a broad range of properties; you personally contribute $2 million to diversify your investments across more than just a couple properties, and you are paid based on your share of the investments as a whole.
How APCM Helps Our Clients with Interest in Real Estate
APCM offers our clients the potential to gain real estate exposure in a few of the ways listed above. Our clients can own shares of REITs or access private fund investing. We also can incorporate your current direct property investments into our financial planning to give you the full picture of your outlook. If this appeals to you, our team at APCM is here to help.
Private Wealth Intern