Real estate investments offer reliable long-term returns. The value of well-selected property tends to rise faster than the inflation rate.
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Renting out commercial or residential properties to tenants generates profits for investors, as does realizing capital gains from the sale of these properties.
Core Investments
Core real estate investment is typically made up of properties that are high quality and have long-term leases. These generate a steady income, while being 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.
Core investments are an ideal choice for investors who seek high single digit returns with minimal hands-on involvement, making this investment category popular with larger institutional investors such as pensions and endowments due to its relatively low risk profile.
Consider a core investment that has an internal rate return of 6%. This property will generate a $5 million capital gain after 20 years. However, the value of this asset depends more on market conditions, timing, and other factors than on the physical asset.
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 look for properties with below-market rents or rentals at lower than anticipated rental rates, and take advantage of any increased NOI to turn around and sell or hold on for improved 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
Want to invest in real estate, but do not want to manage the properties? Consider investing in a managed fund. These funds typically invest in various property types, regions and risk/reward profiles so as to provide greater diversification than REITs or single 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.
Be mindful of fees and carried interest. 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
Online real estate crowdfunding gives investors access to the real estate market with minimal 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 are similar to mutual funds, in that they offer the potential of higher returns because of lower operating costs. They also have less volatility due to the fact that they do not trade on the open market.
CrowdStreet offers attractive returns to accredited investors who are willing to invest money in the long term. While these platforms provide minimal due diligence checks, it is still wise to conduct your own research prior to investing illiquid investments like CrowdStreet or EquityMultiple that could potentially lose all or some of your initial capital investment. This type of investment should not be the sole source of wealth for a portfolio, but rather a part of it.