According to Forbes, real estate investments have created more billionaires than any other type of investment. A study by the San Francisco Federal Reserve showed that over 100 years, real estate had a higher rate of return than stocks (11.1% vs. 10.8%) with significantly less volatility (10.7 vs 22.8).
While those returns may sound extremely appealing, the work associated with traditional real estate investments – buying and flipping or renting houses – may sound a lot less appealing. Fortunately, there’s a solution that gives you the best of both worlds.
By passively investing in real estate, you can create long term wealth without having to manage a construction project or be a landlord. Despite its name, passive investing still requires some work, as does any investment. It’s always wise to do your homework before and after making an investment. Passive means you aren’t running the day-to-day operations but you still benefit financially if the investment is success.
There are multiple ways to passively invest in real estate, each with their own pros and cons.
⌂ Real Estate Investment Trust (REIT) | A REIT is like a mutual fund. Investors purchase shares through the stock market. Professional REIT managers determine how to invest the funds into a portfolio of real estate properties, similar to a mutual fund manager but focused on real estate. REITs often specialize in specific types of commercial real estate, such as apartment buildings, hospitals, offices etc. REITs typically pay high dividends and can provide a diversified source of income. While individual performance will vary, average annualized long-term returns on REITs are 9.6%.
⌂ Real estate syndication and crowdfunding – If an experienced developer has a real estate opportunity, but can not or does not want to fund it entirely on their own, they can use crowdfunding to raise money for the opportunity. This is often done for one specific property, but does not have to be limited to one property. The real estate professional will purchase the asset, renovate as needed, coordinate financing, improve operations, stabilize the asset and ultimately be responsible for the sale. In a nutshell, they are flipping the property and investors can get a piece of the profit. These deals can be quite profitable with many reporting annualized IRR (internal rate of return) over 14%. The risks can be greater than a REIT since you are investing in one or a small number of properties, but the returns can also be significantly higher.
There are many benefits to passively investing in real estate, including:
⌂ Leverage | By pooling funds with others, you can purchase more real estate than you could on your own. Most of investors can’t or don’t want to buy an entire office or apartment building on their own.
⌂ Diversification | Investing in real estate provides diversification in your overall investment portfolio. You can also diversify within real estate by investing in multiple properties, different types of properties,
different geographic locations, etc.
⌂ Forced Appreciation | Commercial real estate isn’t valued based on comps of neighboring properties, like your home. The value comes from Net Operating Income (NOI). If the asset generates more income, the value of your investment increases.
⌂ Invest with Experts | Passive investing means you have the opportunity to invest with experienced real-estate developers who know where to invest, how to finance, and how to add value to properties.
⌂ Tax Incentives | Investing through a syndication may give passive investors the benefits of deprecation of the asset, and in some cases accelerated bonus depreciation.
Fort + Home offers two ways to passively in real estate.
⌂ Real estate funds that purchase, renovate, and sell multiple real estate properties in the Rocky Mountain region. The Value-add Residential Fund (VRF) is an example of this business model.
⌂ Specific real estate projects, which are typically multi-use or multi-family buildings.
If you interested in learning more about investing with Fort + Home, contact us.
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