Investing in real estate can be a rewarding venture, yet it may be complex and tasking. The real estate market offers opportunities for investment diversification with the possibility of potential gains — through rental income, dividends or capital gains. Various types of real estate investments exist in the market with different forms of operations.
You could decide to go the common route of acquiring property directly, either as a primary residence or for rental income. Alternatively, you could explore non-conventional investment opportunities such as alternative investments in properties through different vehicles and programs. Most alternative investments give you access to pooled ownership in institutional properties that would not ordinarily be affordable on an individual level. Investing in real estate through alternative investments is often considered a passive form of investment.
There are many determining factors at play that impact how well investments in real estate perform. Whether you are looking to make your first property investment or you’re making a decision to increase your property portfolio through real estate investments, there are certain factors to consider in order to make your investments worthwhile. Investing in real estate requires careful consideration and some of the important things to look out for are:
Investment Location
Location is an important aspect when considering investing in real estate. It is recommended to do your due diligence to ensure that the preferred location for property purchase fits your investment goals and objectives. Some real estate investment locations may have a direct or indirect impact on property value appreciation. On the other hand, investing in certain locations may drive down the value of your real estate property.
Also, investing in real estate in certain locations may attract tax benefits. An example is investing through the Qualified Opportunity Zone programs. Purchasing real estate property through Qualified Opportunity Funds (QOFs) enables you to invest in Qualified Opportunity Zones. This investment opportunity gives you access to tax benefits such as tax deferral, capital gain reduction or even possible total tax elimination when investment property is held in an eligible region for up to ten years.
If you are looking to take advantage of these tax advantages, your choice of investment location would be limited to the eligible economically distressed communities.
Investment Objectives
As an investor, your investment objectives are important in deciding which real estate property to purchase or invest in. Your objectives could range from short term goals — to take advantage of any capital returns, or long term goals — to capitalize on wealth building, property capital appreciation or available tax advantages. These investment objectives would determine which investment vehicle or type is best suitable for your financial situation and status.
Your risk appetite also impacts your investment decisions. Investing in real estate can be risky, some forms of property investments may be deemed riskier than others. It is advisable to partner with real estate sponsors that outline the associated risks that accompany different investment types. This allows you to make well informed investment decisions.
Cost and Budget
Purchasing real estate property can be expensive, especially if you want to invest in a high end location. Some forms of real estate opportunities can be assessed by an average investor. However, there are investment types that are only available to accredited investors due to the nature and cost of these investments.
A couple of property investment options like REITs provide a means to invest in high quality investment properties for a fraction of the cost. So, if you have a low budget, you can buy share units through a REIT for low amounts. On the other hand, accredited investors with high net worth can purchase higher value fractional units in institutional quality properties through investment vehicles like Delaware Statutory Trust (DSTs).
Investing in real estate comes with certain costs that can also be viewed in terms of the risks involved. You need to consider the cons of investing in real estate through certain programs or vehicles. Some of the downsides of alternative investments through real estate may include non-guaranteed gains —the possibility of not making profits, capital investment loss and illiquid markets —funds may be tied down in investment units for the possible long term.
Possible Returns
The next key factor to consider is how profitable your real estate investment could potentially become. Usually, the major goal for property investment is to make returns. However, like other forms of investments, real estate investments may offer benefits, but they also have inherent risks. Generally, the different forms of property investment can be complex in nature. It is important to weigh the possible benefits against the risks and also consider the cons involved when investing in real estate.
Most forms of property investments offer returns in the form of rental income and capital gains when eventually sold — that is, if the property appreciates and market value is higher than original cost of purchase.
Returns and gains through investing in real estate are not guaranteed. Some real estate investment vehicles are volatile like the stock market such as the publicly traded REITs. The risks associated with these types of real estate investments are usually correlated to the market. The value of investment may fluctuate. Other possible risks include economic, legal and political risks. These may impact any potential returns in the form of rental income, dividends or capital gains.
Consider choosing an investment partner and vehicle that shows proof of satisfactory historical performance and returns. It is important to note that this does not guarantee future performances.
Form of Investment
When investing in real estate, one key factor to consider is the form of investment you want to explore. This is somewhat connected to your investment objectives. Real estate investments can be in residential properties, commercial properties or retail properties. There are various forms of real estate investments.
Direct Investments: This form of investment would require you to be directly involved with the management and maintenance of the real estate property you choose to invest in. Investing in real estate through direct investments can be tasking and time-consuming. This form of investment is suitable for investors that are hands on and have the time needed to directly oversee the day-to-day operations of their property investments.
Indirect Investments: This type of property investments provide a passive form of real estate investment. The responsibility of managing the investment property is transferred to a property manager or an investment partner. If you do not want to deal with the hassles of renting out property to tenants or maintaining buildings, this would be a considerable form of real estate investment for you.
Common vehicles for investing in real estate include:
Tenants In Common (TIC): Investing in real estate through a tenancy in common means you can own a shared title in real estate property. This type of real estate investment is governed by an agreement that outlines the rights, liabilities and responsibilities of each party that owns shares in the TIC. This could include items such as property taxes, maintenance, mortgage payments, etc. The tenancy in common legal implications may vary across jurisdictions, therefore check with legal practitioners and real estate professionals on what applies to your investment location.
Real Estate Investment Trust (REITs): Investors have the opportunity to passively invest in real estate through REITs. This works in a similar way to buying stocks in a company. REITs can be publicly traded in the stock market or owned as non-exchange traded REITs. The form of REIT ownership determines how liquid it is, that is how easily it can be sold. Most Direct Participation Programs (DPP) offer investors the opportunity to invest in REITs.
Delaware Statutory Trust (DSTs): This investment vehicle gives investors the opportunity to diversify their investment portfolio through institutional quality investments for a fraction of the cost. DSTs operate as separate legal entities giving investors — also known as the beneficial owners of interest in the trust — limited liability in the operations and assets of the trust. DSTs qualify as 1031 like-kind exchanges for tax deferral benefits. Investors can reinvest their capital gains from property sale into like kind replacement property and take advantage of deferring tax to a later period when the replacement property is eventually sold. A DST is a highly illiquid form of real estate investment and should be explored by investors looking to invest for the long term.
Investing in real estate sure has its pros and cons. Make sure to carry out extensive research and use professional advisors when weighing out your options. Different real estate investment types may have varying tax and legal implications for you as an investor. As discussed above, consider the potential investment locations, possible returns and risks associated with each real estate investment option, your investment objectives and the budget set aside for property investment. These considerations can help you make the optimal investment decisions that are suitable for your short term and long-term goals.
Investing in real estate can offer a means for portfolio diversification which in turn may cushion any impact of losses on your entire portfolio. Similar to other forms of investment, there is no hundred percent guarantee on returns or total protection against investment losses.
Stax Capital offers real estate investments through Delaware Statutory Trusts, Qualified Opportunity Funds and Direct Participation Programs. We carry out adequate due diligence processes to ensure that we provide credible property investments that maybe beneficial for your portfolio. Contact the team to discuss which investment option is best suitable for you.
