Building your wealth with real estate is easier than you think — if you have a plan, of course. Real estate has long been part of investment strategies for countless years and continues to be the preferred investment option of many people, aiming for larger returns. However, investing in real estate doesn’t mean you have to flip houses, or collect rent. Incorporating into your portfolio, any of the following three, real estate investment options, can set you on the right track to building your wealth quickly and effortlessly.
Real Estate Investment Trust (REIT)
A Real Estate Investment Trust, or REIT is a type of real estate investment company, either publicly traded, or non-traded, selling shares of income-producing real estate to investors. Property shares are most commonly offered as commercial real estate, providing some level of liquidity. REITs generate high yields for investors by operating on the basis of equity, mortgage, or a combination of both, known as hybrid. Just like publicly traded securities, REITs, are conventionally listed on a major stock exchange, although there are non-traded REITs as well. You can invest in both publicly traded and non-traded REITs through a broker, REIT mutual fund, or REIT exchange-traded fund.
The upside to investing in an REIT is the ability to earn a long-term, steady, income stream of high dividends upwards of 3%-4% for publicly traded and 7% for non-traded.1 Since commercial real estate contracts are offered to occupying tenants generally for several years, or more (in either short-term or long-term lease agreements), you can expect to continue receiving a portion of the earnings over time, which can be a major plus for passive investors looking to invest in real estate.
Just like any investment, there is a certain level of risk to assess. Although REITs are considered more of a moderateisk investment option, non-traded REITs are slightly riskier than those which are publicly traded. In the event of real estate market decline, it can be difficult to sell non-traded shares. Additionally, REIT broker fees can add up quickly, which could minimize your principal investment by a considerable amount. According to WSJ online, broker fees can be as high as 11% to start.2 Not to mention any maintenance and additional fees that may apply.
The concept of crowdfunding, although relatively new, has picked up much traction within the past few years. The term is used to describe a new method of raising capital, for private, real estate projects through a collaboration of investors. It’s not unusual to find a pool of 500, or more investors for one real estate development. Organizations who utilize the crowdfunding technique for real estate ventures can easily be compared to REITs in similar aspects. However, crowdfunding differs from REITs by extending the investment opportunity to “novel,” or “average” investors. This method also focuses on private, real estate investments as opposed to publicly traded shares of properties. As a result of the JOBS (Jumpstart Our Business Startups) Act, signed by President Obama in April of 2012, people who make less than $100,000.00 per year can invest in these companies up to a maximum amount, while higher-earning investors have different limitations. Collected funds are used to build and develop private real estate, while promising higher than average returns after a specific period of time.
Crowdfunding is an attractive investment option for both conventional and nonconventional investors looking to diversify their portfolios with private real estate investments. It’s an alternative option for those looking to quickly invest in tangible assets with high returns upon maturity. Since, the majority of crowdfunding companies use an online funding platform, investors can easily set up an account and invest from just about anywhere.
There is plenty of questionable concern regarding this new investment trend. Skeptics have argued that crowdfunding is an easy channel for fraud and failure, since many of these companies are start-ups. Considering this combination, novice investors may be feel uncomfortable with waiting several years for a return on their principal investment. However, investment terms do not even commence until the full amount of capital needed to fund the project is raised. If the target is not met, investors waste their time and any potential return that could have been earned investing elsewhere. It’s a risky investment option that also comes with initial and maintenance fees.
Real estate investment companies may use Limited Partnerships (LPs) for the purpose of a business venture. LPs are legally formed with one, or more general and limited partners. The general partner is solely responsible for the operations of the business, including its debts, while the limited partner has no involvement in the day-to-day operations and is exclusively responsible for capital invested in the venture. It’s a way to actively invest, as a passive investor. Our company, for example, utilizes LPs for the purpose of providing private mortgages to real estate investors. Accredited investors can ultimately invest in real estate, as limited partners, with a minimum LP investment of $10,000.00. Investment terms range from 6 months to three years, yielding returns of up to 6%, respectively. This capital is then disbursed in the form of private mortgages to real estate investors looking for development funds. All properties remain as collateral until the mortgages are paid off.
Accredited investors looking to passively invest in real estate, can consider a limited partnership with a real estate investment company, a favorable option. For those who meet the legal investment requirements, investing in a limited partnership (LP), can be compared to investing funds in a certificate of deposit (CD). However, an LP is a relatively lowisk investment with higher than average returns, which are compounded yearly at a fixed interest rate. Upon investment maturity, interest accrued along with initial funds can be retrieved, or re-invested. Unlike REITs and crowdfunders, Jakob Pek Fund, does not charge any investment or maintenance fees for LP investments.
Like the above mentioned investment options, some level of risk is always involved. It’s essentially important for investors to do their due diligence on who they are partnering with when evaluating LPs as an investment option. The general partner does have control of the business and its operations, therefore partnering with an experienced US real estate investment company is absolutely vital. Additionally, investors should steer clear of international real estate investment companies. Property laws across different countries differ significantly from those in the US, which could make it a highly complicated investment. In some cases, fraudulent and illegal practices may even take place, making it very difficult to see those returns or principal investment back again.