Real estate has been considered as a profitable investment for its reliable nature. The first thing that comes to our mind when listening to the word real estate investment is property. In reality, real estate investments are so much more than just property ownership. While property ownership is the traditional way of investing in real estate, there are other alternatives such as Real Estate Investment Trusts (REITs), Real Estate Crowdfunding, Real Estate syndication and so on. By participating in real estate through these various options, you can earn attractive returns. This blog gives you an overview on the different alternatives available, to embed you with knowledge for your future investment endeavors.
1. Real Estate Investment Trusts (REITs)
Real Estate Investment Trusts (REITs) are known for being the most popular indirect real estate investment methods. REITs are corporations that own and manage portfolios of high value, income generating real estate properties such as shopping centers, residential complexes and commercial buildings. They allow you to invest in these vast numbers of real estate properties offering regular dividends, high liquidity and without the problem of property management. This popular alternative is gaining traction due to the ease in owning shares of these companies and earning profits through real estate without the responsibilities of being a property owner. Thereafter, the rent collected from the leased properties is distributed as dividends and income among the shareholders.
REITs allow easy selling and buying along with enhancing the liquidity aspect as often they are traded on public stock exchanges. Moreover, REITs increase the potential for capital appreciation and ensure a steady dividend income for the investors. Further, this popular alternative is regulated by SEBI and files audited financial reports, enabling transparency by providing the investors with data on ownership, zoning and taxation. Trading on stock exchanges offers an option to diversify in the market of real estate. In addition to generating a steady income, investing in REITs offers risk-adjusted returns even during high inflation periods.
Investing in REITs does not provide tax benefits as the dividends earned from REIT companies are subject to taxation. Additionally, REITs are susceptible to market-linked fluctuations, posing a significant risk for investors with a low-risk appetite. It is essential to carefully consider the return-generating capacity of this investment before committing.
2. Real Estate Crowdfunding
Crowdfunding is one of the popular alternative real estate investment methods that allows individuals to invest in a particular project in small amounts of money. This is done through online crowdfunding platforms with the potential to reach a larger audience, where the funds are pooled together from various investors. The most common way to invest these pooled funds is through Real Estate Investment Trusts (REITs). This well-known non-traditional investment method gives the developer access to finance real estate development projects. Whereas for investors, crowdfunding is a golden opportunity to be shareholders in real estate projects, which otherwise would be difficult to afford individually. The funds collected from the crowdfunding are then utilized by the developers to finish a project. Crowdfunding provides investors with a steady higher income compared to publicly traded REITs, for instance from rental income. Comparatively, the higher profit is associated with higher risk.
Passive income, diversification, lower investment requirements and access to unique projects are some of the benefits of choosing this type of investment. It is essential for investors to conduct thorough research to dwell into factors like market risks, taxes and growth prospects of the potential investment into the project through real estate crowdfunding.
3. Real Estate Limited Partnership (RELP)
Real Estate Limited Partnership (RELP) or Real Estate Partnership allows you to be involved in real estate investments on a more personal level through collaborative efforts with various investors. Real Estate Partnership integrates the strengths of two or more investors to work on a single investment property. Buying and managing income generating properties by collaborating with various other investors benefits you by mitigating the financial risk of investing. While also increasing the chances for a profitable return on investments through pooling capital, expertise and calculated decisions. Through this the investors not only pave a path for larger and potentially more profitable real estate investments but also benefit from property appreciation and rental income.
Moreover, Real Estate Partnerships offer the ability to diversify your real estate investments and offer tax advantages. According to the involvement of the partners, Real Estate Partnerships are classified into General partnerships and Limited partnerships. General partnerships involve equal liability among the partners as well as shared responsibilities, whereas limited partnerships involve general partners who are responsible for day-to-day operations and limited partners who are considered as silent partners and only invest capital.
Problems regarding the roles and responsibilities of the partners may arise in real estate partnerships even though they offer noticeable benefits like payment flexibility and larger investment potential. Nevertheless, a partnership agreement with detailed roles and responsibilities and effective communication can guide the partnership to success.
4. Real Estate Syndication
This method of alternative real estate investment is not so well known but it has been gaining popularity among investors who don’t want to become property owners but want to profit from the high return possibility of real estate. In practice, real estate syndication typically pairs developers and knowledgeable real estate professionals with investors who are looking to put capital to work. Real estate syndication is a process where a group of investors pool their capital to purchase commercial real estate or undertake a construction project. It involves a partnership between developers or real estate professionals (the sponsors) and passive investors (the limited partners). The sponsors oversee the investment, while the limited partners contribute the majority of the capital.
Investing in real estate syndication offers several advantages. It can provide high potential returns, access to unique real estate opportunities that would otherwise be challenging to participate in, and portfolio diversification. However, there are also drawbacks to consider. Syndicated real estate investments are liquid, meaning they cannot be easily sold, and the performance is tied to a single asset, which can result in losses. Additionally, income from syndicated real estate deals can be inconsistent, and investors typically need to be accredited to participate.
5. Real Estate Mutual Funds
The Real estate mutual funds are invested in the securities of companies in the real estate sector providing a source of capital for developing property. Usually, these funds are allocated across various real estate properties by expert investment managers. For investors who want to gain exposure in the real estate market with limited funds, this is a suitable alternative. This method is an alternative to the traditional investment method of purchasing a property and allows investors to earn returns from the real estate market.
Protection against inflation, flexibility in investment amount and diversification across various locations and properties are some advantages of real estate mutual funds. Nonetheless, it also poses disadvantages such as market risk, as the performance of the fund is dependent on the demand for the properties and the interest rate risk is also a factor as changing interest rates directly impact borrowing rates and, consequently, the real estate market.
6. Real Estate Exchange-Traded Funds (ETFs)
Just like Real Estate Mutual Funds, ETFs are known to expose investors in the real estate market. This pooled investment security tracks a particular commodity, index, sector and other assets. EFTs are differentiated from mutual funds, through their ability to be bought and sold on the stock exchange just like regular stock. The liquidity and flexibility of Real Estate EFTs make them an attractive alternative for investors. It also provides a chance to diversify across various properties. They can track the price of individual commodities or a diverse range of securities. Furthermore, ETFs can be structured to follow specific investment strategies, allowing investors to access targeted market exposure.
The real estate investment sector offers a variety of alternative real estate investment options apart from traditional property ownership. While these alternatives provide you with various benefits without having to buy a property, keep in mind all investment decisions involve a risk factor. Consider seeking advice from financial experts and real estate professionals to make more informed decisions based on real-time information. Contact Jones Asset Management, to find the best alternative real estate investment options that cater to your needs.
Happy Investing!
