HOW TO INVEST IN REAL ESTATE?
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Who is an Accredited Investor?
Investors can be accredited or non-accredited, which loosely is a proxy for the level of investment experience, financial soundness and ability to understand the risk-reward trade-off of an investment.
Non-accredited investors are only allowed to invest in investments that are registered with the SEC, while accredited investors have a wide choice of investments from individual to pool of investments to investment funds, all the way to private equity, as examples.
One can get Accredited Investor Certificate from either your CPA or from one of the online institutions like verifyinvestor.com.
The criteria for who is an accredited investor are continuously refined by SEC; the latest qualifications are described in this SEC article while this Investopedia article shows you how to get accredited.
What is active vs passive real estate investing?
At A high level, active real estate investing requires that you are hands-on in several/all aspects of the lifecycle of real estate investing – analyzing assets, identifying the right asset to invest in, financing and purchasing the asset, screening and identifying the lessors/tenants, contracting with tenants, managing/maintaining/improving the asset, and selling the asset. This requires tremendous amount of time and expertise, and is rewarded with significant returns. Considering the amount of work involved, one can focus only on a small number of assets that are actively managed.
At a high level, passive real estate investing involves investing indirectly in real estate through Real Estate Investment Trusts (REITs), Real Estate Funds, Syndication, or Crowdfunding; in all these investment vehicles, you are identifying which asset/fund to invest in, and make the investment. Your work is much less because you are not involved in the day to day, and your liability is less because you share it with the rest of the investors. It is more liquid since such investments can usually be bough and sold in markets/marketplaces.
A hybrid way to invest involves being an active investor in the identification, purchase and sale of the property, but leave the day to day management to a property management company. This enables you to scale further than being a pure active investor while retaining the high returns and low liquidity of direct purchase of real estate assets.
This article from Alliance Virtual Offices provides a good overview of active vs passive, and provides a framework for you to decide which role is best suited for you .
How can I invest in real estate?
There are several direct and indirect ways of investing in real estate. Check out this article from MotleyFool for a detailed coverage of various ways to invest in real estate.
What is fractional real estate investing?
Investing in fractional shares has become a common strategy to create a diversified portfolio of stocks; this technique becomes especially handy when the amount of money available to invest in stocks is much smaller than the total value of the basket of stocks you wish to invest in.
Typically, the value of an entire real estate asset is significantly higher than the value of a single share of stock. Hence, at a high level, the principles that make diversification and fractional share investing desirable, are even more applicable in the case of fractional real estate investing.
With fractional real estate investing, you can invest in a fraction of each asset, thus creating desired level of diversification which can span across regions, across types of real estate classes, across various durations of investment, across types of returns, managed fund vs direct investment, direct vs indirect management, and so on. For more information, review this article from SmartAsset
How can I do fractional investment in real estate?
- Popular ways to do fractional real estate investments are:
- Invest in fractional ownership of specific asset or set of assets, for a specified period of time, through investment portals like RealtySlices.com. The minimums are significantly lower than purchasing the asset outright (or forming a syndicate with a small set of co-investors) and there is a lock-in period. Given that the investor knows the specific asset(s) into which her/his money is being invested in, she can do more due diligence to assess the risk – reward spectrum of the investment. Ex: the investor has the opportunity to invest a specific minimum amount in a specific apartment complex in Seattle for a period of x years, with y% projected cash-on-cash return and z% projected annualized IRR for the investor.
- Purchase shares in a REIT (Real Estate Investment Trust) – REITs are typically thematic in that they focus on specific type of properties like office or multi-family or warehouse, in a specific geographic area like sunbelt or mid-west, with a specific type of investment strategy like core or value-add, and so on. Investments in REITs are usually liquid, and the managers of REITs decide on which assets to be invest/redeem and the mix, and can charge a combination of front-end/back-end load and asset management fees. At a high level, investing in REIT is like investing in a mutual fund. REITs are generally lower risk than investing in a single asset, and the returns are potentially lower, commensurate with the risk.
- Form a special purpose vehicle (SPV usually formed as an LLC) with a group of other investors and have the resulting entity own the asset; entity by-laws describe how the LLC will be managed. This requires one or more members to actively manage the asset. This approach is typically suited for people who have the time and expertise in all facets of real estate business and operational management.
For more comprehensive info on this vast subject, check out this article from AssetMonk
What are key considerations in deciding if I want to do fractional real estate investing?
Every investment class and every investment approach has inherent pros and cons. We have already discussed the pros and cons of Real Estate vs other asset classes. This article from The College Investor provides a good framework for assessing your suitability for fractional real estate investing.Can I use IRA funds for fractional real estate investing?
You can use funds from a self-directed IRA for fractional investing. This IRAadvantage article gives you guidelines on how to go about setting up one, and this Investopedia article provides a framework for assessing such investments.