There are many opportunities for investing ‘passively’ in real estate these days, where you can come together with other investors and get some of the upsides of investing in real estate without actually having to run the property yourself. What this essentially means is that you do your due diligence in finding the investment, but then a company or a sponsor takes care of the rest - finding the financing, collecting rents, doing maintenance, in some cases building the property and in some cases improving the property, and most times, eventually selling the property for profit.
The opportunities you will qualify for usually depend on whether or not you are an accredited investor. This is not a test you have to pass - it’s just an attestation that you meet criteria of $200k or more in income for 2 years as an individual and/or $300k in income as a married couple for 2 years, and/or a net worth of $1 million. If you meet any of those criteria, you’re an accredited investor.
In each of these cases, you are pooling capital with other investors to purchase real estate. The size of the pool and the number of investors will vary, and therefore the amount you need to invest to participate is different. Publicly traded REIT (real estate investment trust) require the least investment, and private syndications the most. Review each section below for more about these outlets and their pros and cons.
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Publicly Traded REITs
Most of you probably hold REITs in your investment portfolios and may not even realize it. A REIT owns (and in many cases, operates) income producing real estate. They can hold many different types of assets or specialize in a certain asset class within real estate, such as office and apartment buildings, warehouses, hospitals, shopping centers, or hotels. By diversifying amongst a number of assets, the idea is that they are lower risk. The stockholders of a REIT earn a share of the income produced or the profit from capital appreciation.
Pros:
Very liquid (can buy and sell at any time).
No minimum investment.
May qualify for 199A tax deduction (talk to your accountant for more details about this).
Diversification across many projects, limiting risk that one investment doing poorly will have a huge impact on your returns.
Do not have to be an accredited investor.
Cons:
Tends to fluctuate in value in accordance with the stock market, so you don't usually get the degree of diversification into a different asset class people typically want from expanding into real estate.
You don’t get some of the bigger tax advantages of real estate because you don’t get to take advantage of depreciation.
Returns are not on average historically as high as recent private real estate syndication offerings.
Privately Traded REITs
These are REITs as above, but not traded on the public markets, and generally accessible through institutional investors or crowdfunding websites.
Pros:
May or may not have to be an accredited investor.
Usually lower minimum investments compared to private syndications (as little as $500).
Not closely tied to the stock market, like publicly traded REITs are, offering greater diversification from stock market swings, and performance that is more based on the asset performance.
May qualify for 199A tax deduction (talk to your accountant for more details about this).
Diversification across many projects, limiting risk that one investment doing poorly will have a huge impact on your returns.
Cons:
You don’t get some of the bigger tax advantages of real estate because you don’t get to take advantage of depreciation against your cash flow on your tax return.
Returns are not on average historically as high as recent private real estate syndication offerings.
Not as liquid (typically have to hold for a few years).
Private Syndications
These deals are partnerships between a "syndicator" or "sponsor" and a group of investors. The sponsor individual or company is the experienced real estate professional that finds, acquires, and manages the real estate. They seek out projects and underwrite and do due diligence on potential investments, and once they find one they feel will be profitable, seek investors to help finance the deal. The investors then own a percentage of the real estate, and as such, get all the benefits of property ownership, but are not involved with acquiring, financing, or managing the real estate. The sponsor or syndicator will take fees and/or a percentage of the profits for performing these functions. You can learn a lot more about syndications from our primer on real estate syndications.
Pros:
You can pick an individual project and a sponsor you believe in.
Should ideally be less fees than crowdfunding platforms if you go directly to the source.
You can get the tax advantages of depreciation during the life of the deal.
More significant percentage ownership than in REITs, and usually higher potential upside.
The sponsor also has skin in the game, as the biggest part of their upside usually comes only after paying you a certain amount in returns.
Cons:
Higher investment minimums (typically at $50k-100k these days, though some sponsors will offer lower minimums).
Usually need to be an accredited investor (some exceptions based on the structure of the deal).
Regardless of whether you’re investing in a 'fund' (a compilation of properties by the same sponsor/syndicator) or a single property, there’s less diversification than you get with REITs, where there are usually more properties. So, more risk of downside (but also more chance for upside). Combined with higher minimums than REITs, this means most people feel they need to do more due diligence on the individual holding.
Not as liquid (typically have to hold for a few years).
Crowdfunding Platforms
These sites raise money by collecting small amounts of money from a large number of people. There are crowdfunding sites geared towards REITs, syndications, and both. Depending on the platform, you may or may not need to be an accredited investor.
Pros:
Lower minimums than private syndication companies, but still get access to larger deals.
You can get your eyes on a lot of deals that you may not otherwise have access to seeing when you're first starting out. You can still pick an individual project and a sponsor you believe in.
May not need to be an accredited investor
You can get the tax advantages of depreciation and percentage ownership on the upside potential if it's for a syndication.
Cons:
You may have higher fees.
The crowdfunding company may not have 'skin in the game'; that is, if they make their money only through fundraising, they may not be incentivized by the long term performance of the assets they present on the platform. Some crowdfunding companies do have skin in the game and invest alongside investors.
Large number of different sponsors means you must individually do due diligence on not just the individual investment you are considering, but also the sponsor.
Not as liquid (typically have to hold for a few years).
As you become more comfortable vetting opportunities and sponsors, your return potential can increase a lot by cutting out fees and picking the ‘winners.’ In some ways it’s like investing in an index fund (REIT) versus an individual stock (crowdfunding/syndications) - higher risk, higher rewards (or in a worst case, higher losses!). Always remember that past performance is not a predictor of future performance, and as with any investment, you could lose money. Learn how to vet real estate deals through our free real estate education series on the group (links to previous recordings are available on our events page), or through these resources.
Resources
If you are looking for real estate opportunities, here are some of our sponsors/affiliates of our FREE real estate education series (sign up for our free real estate education series on our group) . Remember this is not an endorsement of these opportunities - each one is different and you should do your own due diligence, consult appropriate expertise, and pick investments based on your individual investment goals and risk profile.
Reminder: The opportunities you will qualify for usually depend on whether or not you are an accredited investor. This is not a test you have to pass - it’s just an attestation that you meet criteria of $200k or more in income for 2 years as an individual and/or $300k in income as a married couple for 2 years, and/or a net worth of $1 million. If you meet any of those criteria, you’re an accredited investor.:
Private REITs
DLP Capital offers private real estate funds with different structures and assets depending on your preferences. See more on our partnership landing page here. You qualify for lower minimum investment amounts through their sponsorship of our real estate education series.
Realty Mogul (minimums as low as $5,000, do not need to be an accredited investor)
Fundrise (do not need to be an accredited investor)
Crowdfunding Platforms for Syndications
RealtyMogul (also offer individual projects in addition to REITs above)
EquityMultiple: must be an accredited investor
Private Syndication Companies
(Let them know that you are coming from PSG, in case they are offering perks to the group!)
Sovereign Properties (development deals in multifamily)