Some professionals like business owners, sole practitioners, front-line medical pros, and others don’t have an extra five hours a month to spare for hands-on real estate investing.
They understand the value of allocating to real estate in an investment portfolio; they can’t imagine allocating the time. Where in their busy schedules will they be able to squeeze in time for prospecting, buying, fixing, renting/selling, wholesaling, or otherwise?
Luckily for busy professionals, direct investing is not the only option for investing in real estate. There are passive options available.
Here are five ways for busy professionals to invest in real estate:
REAL ESTATE STOCK.
Investors have the public option to invest in real estate without investing in a REIT. These real estate companies, commonly known as Real Estate Operating Companies (REOCs), invest in and operate CRE without the formal distribution and tax compliance requirements associated with REITs.
Like your typical public company, REOCs are not statutorily required to distribute dividends like REITs, and investors achieve gains, if any, through appreciation in the price of the stock while they are held.
Pros: Highly liquid, available and affordable. Investors can buy as little as one share of any REOC in a matter of minutes, and in the case of free trading platform Robinhood, even do so cost-free and on margin.
Cons: Gains are solely dependent on the price going up during the hold period. There are no guaranteed distributions, and because they’re traded on the public markets, they are susceptible to wide market volatility.
REITS.
Public Real Estate Investment Trusts (REITs) are public companies that invest directly in commercial real estate. They are statutorily required by the internal revenue code (IRC) to distribute at least 90% of its taxable income to shareholders annually in the form of dividends.
Pros: Investors can expect to receive IRC-mandated periodic dividends. Also, like other public stocks, REITs are highly liquid with low barriers to entry.
Cons: The 90% rule does not guarantee distributions. Although REITs are required to distribute 90% of its “taxable income” and not gross income to investors, this is where investors can get left in the cold.
Unscrupulous or inefficient management can deplete taxable income through high salaries and excessive management fees – leaving little left for investors. In addition, the liquidity of REITs is also its weakness since they can be subject to the same market volatility as all other stocks and just as prone to market crashes as the COVID-induced crash last March proved.
REAL ESTATE CROWDFUNDING.
Real estate crowdfunding allows investors to invest in commercial real estate (typically a single asset) by pooling funds with other investors through a crowdfunding platform. Although considered private investments, the crowdfunding rules are a little more relaxed regarding advertising and investor requirements. As a result, they’re more visible and accessible to the average investor than the typical private investment.
Pros: Available to non-accredited investors. Investors can invest in commercial-grade real estate without the high-cost barrier. By pooling capital, individual investors can invest as little as $10,000, $15,000, and $20,000, depending on the fund. It allows average investors to achieve above-market, uncorrelated returns traditionally reserved for the wealthy.
Cons: Crowdfunded real estate funds have been known to incur REIT-like management fees that can diminish returns. Real estate crowdfunding is also illiquid, with minimum tie-up periods of 5-7 years. Additionally, non-accredited investors are subject to investment limits based on income and net-worth criteria.
REAL ESTATE PRIVATE EQUITY.
Real estate private equity (or debt) are passive investments in private real estate companies. Equity investments are typically in the form of S-Corp shares or limited partnership, or limited liability company interests.
Real estate private equity (PE) companies generally are not property-specific and can invest in multiple properties or other companies.
Pros: Real estate PE has long been favored by the ultra-wealthy for their above-market returns to investors shielded from Wall Street volatility. Invested in the right segments, real estate PE can also be a counter to inflation. Finally, diversification can be achieved through a single fund – in the right hands.
Cons: Typically restricted to accredited investors, real estate PE typically also has higher investment minimums ($50k+). Some PE funds like those managed by investment giants like Blackrock have high management fees and expenses.
REAL ESTATE SYNDICATIONS.
Real estate syndications are investments in private commercial real estate companies, typically through a partnership structure (LPs and LLCs). Real estate syndications are distinguished from other private real estate investments by their waterfall compensation structures, putting the investors first.
Investors get the first bite at net profits through a syndication waterfall structure through a preferred return – a fixed annualized return based on a fixed percentage of an investor’s capital balance.
For example, an investor who invests $100,000 and is entitled to an 8% preferred return will be entitled to an annual return of $8,000 before any profit distributions to management or principals.
After payment of the preferred return, profits from operations are split between the Sponsor and investors based on predetermined percentages. Finally, upon the sale of a property, profits are first distributed to investors until they’ve received a return of capital, with the remaining profits split between the Sponsor and investors.
Pros: Investors typically get paid first. Like other private real estate options, syndications can generate above-market returns from income and appreciation. Syndications are also shielded from Wall Street volatility and offer a buffer from inflation.
In the right hands, syndications can not only offer above-market returns but can do so at significantly less risk than other investment options.
Cons: Syndications are typically restricted to accredited investors and are illiquid.
Investing in real estate no longer has to be a pipe dream for busy professionals.
There are plenty of passive options, with some options more ideal than others.
