If you want to build wealth by investing in real estate, you need to have the time and expertise and be able to manage the properties directly. However, only some real estate investors fulfill all these conditions. This is where Real Estate Investment Trusts (REITs) and Private Equity Real Estate (PERE) come into play. These two types of real estate investment offer the opportunity to invest in real estate without the hands-on property management approach.
Let's look at the different types of real estate investments and help you choose the one that best fits your lifestyle and career desires.
What Are REITs?
A Real Estate Investment Trust, or REIT for short, is a company that owns, operates, or finances income-producing real estate. They were established by Congress in 1960 and allow everyday investors to invest in large-scale real estate. The investors actually purchase shares in a REIT and gain exposure to a portfolio of different properties. The income comes from these assets without having to manage them directly.
Types of REITs
Publicly traded REITs: These are listed on major stock exchanges. Investors can buy and sell them like stocks. The greatest thing about them is that they offer high liquidity and transparency. The disadvantage is that they are subject to market volatility.
Public non-traded REITs: These are registered with the Securities and Exchange Commission but do not trade on national exchanges. They are not impacted by market volatility and tend to be more stable, but the liquidity is far less significant.
Private REITs: These are not registered with the Securities and Exchange Commission, and are typically sold to institutional investors. The good thing about them is that they offer high returns but are often illiquid and far more risky.
The Benefits of REITs
- Investing in a REIT exposes you to a diversified portfolio of real estate assets
- Publicly traded REITs can be easily bought and sold on stock exchanges
- REITs are required to pay at least 90% of their taxable income as dividends, providing a steady income stream
Drawbacks of REITs
- Public traded REITs can be influenced heavily by stock market fluctuations
- The mandatory dividend payouts can limit the capital for growth and investment
- REITs can have management fees and other costs that decrease the returns.
What Is Private Equity Real Estate (PERE)?
Another type of real estate investment is Private Equity Real Estate Investment, which involves investment funds that pool capital to acquire, manage, and sell real estate assets. The difference between REITs and PERE is that PERE funds are not publicly traded. They're typically available only to accredited or high-net-worth investors. Professional investment firms manage these, and many strategies are in place to maximize returns.
Benefits of PERE
- Due to the illiquidity and higher risk, they often offer higher potential Returns.
- Investors in PERE funds have a more direct ownership stake in the property
- PERE investments bring significant tax benefits like depreciation and capital gains deferrals.
Drawbacks of PERE
- The biggest drawback is that they can’t be sold quickly and can lock up capital for several years. The funds often require substantial, making them less accessible to smaller investors.
- It takes much more expertise, and there is more risk to invest in them than in REITs.
The Role of Property Managers
Regardless of the type of real estate investment you are planning to do, property managers can help you bring success to your investment. They are responsible for the day-to-day operations of real estate assets, including leasing, maintenance, and tenant relations. Here's how they can help.
For REITs
Property managers help REITs maintain high occupancy rates and well-maintained properties. They also handle tenant issues and coordinate property improvements.
For PERE
Property managers help PERE by directly impacting the profitability of the investment through their work, including optimizing operations, reducing costs, and improving the properties' appeal to tenants and potential buyers.
Conclusion
REITs and PERE offer compelling opportunities for investors without the hassles of direct property management. With diversification and steady income, PERE offers higher potential returns and direct ownership benefits. Both have their highs and lows and are good ways to increase wealth.
Property managers can play a crucial role in the success of both types of investment when they are in charge of the maintenance and profitability of the property. To make an informed decision and choose the type of real estate investment that suits you better, you need to consider your financial situation, understand the market, and seek expert advice. In that way, real estate investment can be a valuable addition to your investment portfolio.
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