Real Estate Hedge Fund Vs Reits: Whats The Difference
A hedge fund is a business structure that aggregates capital to be deployed in various investment opportunities. Typically, hedge funds invest in liquid assets, such as stocks and bonds. Theres a growing number of real estate hedge funds, however, that will invest in both liquid and illiquid real estate assets.
The difference between a real estate hedge fund and a REIT is that a REIT is a publicly-traded stock of existing real estate companies. Hedge funds can invest in REITs, but REITs cannot invest in hedge funds. Real estate hedge funds are not limited to investing in REITs, however. Real estate hedge funds can also invest their money through the acquisition of actual properties.
Real Estate Investing Can Be Taxing
You may not have to analyze a companys finances or spend your weekend reading financial news to be a successful real estate investor. But dont think its a walk in the park. If you own property, youre in charge of maintaining and repairing it, not to mention paying property taxes, insurance, and the mortgage. And things could get rough if you rent property to troublesome tenants.
Use An Online Real Estate Platform
An online real estate platform such as Fundrise or Crowdstreet can help you get into real estate on bigger commercial deals without having to plunk down hundreds of thousands or even millions on a deal. These platforms help connect developers with investors looking to fund real estate and take advantage of what can be quite attractive potential returns.
The big advantage for investors here is the potential to get a cut of a lucrative deal that they may not have been otherwise able to access. Investors may be able to take part in debt investments or equity investments, depending on the specific deal terms. These investments may pay cash distributions, and may offer the potential for returns that are uncorrelated to the economy, giving investors a way to diversify their portfolios exposure to market-based assets.
These platforms do have some disadvantages, though. Some may accept only accredited investors , so it may not be possible to even use them if you dont already have money. Still, while some platforms may require a $25,000 minimum investment, others may let you in the door with $500.
The platforms also charge a management fee annually, often 1 percent, and they may add other fees on top of that. That may appear pricey in a world where ETFs and mutual funds may charge as little as zero percent for constructing a diversified portfolio of stocks or bonds.
How you make money: Capital appreciation, dividend or interest payments
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Why Invest In Real Estate
Real estate can enhance the risk-and-return profile of an investors portfolio, offering competitive risk-adjusted returns. In general, the real estate market is one of low volatility, especially compared to equities and bonds.
Real estate is also attractive when compared with more-traditional sources of income return. This asset class typically trades at a yield premium to U.S. Treasuries and is especially attractive in an environment where Treasury rates are low.
Reits Vs Real Estate Mutual Funds
Here’s a look at the key differences between REITs and real estate funds:
- REITs invest directly in real estate and own, operate, or finance income-producing properties. Real estate funds typically invest in REITs and real estate-related stocks.
- REITs trade on major exchanges the same way stocks do, and their prices fluctuate throughout the trading session. Most REITs are very liquid and trade under substantial volume. Real estate funds don’t trade like stocks and share prices are updated only once a day. You can buy a real estate fund directly from the company that created it or through an online brokerage.
- 90% of a REIT’s taxable income is paid out as dividends to shareholders, and those dividends are where investors make their money. Real estate funds provide value through appreciation, so they may not be a good choice if you want passive income or short-term profit.
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Correlation To Other Asset Classes
Commercial real estate, in general, has a low correlation to other asset classes such as stocks and bonds. This is because of the highly illiquid nature of real estate, which cannot be purchased and sold on a moments notice. As such, many people will opt to invest in real estate investment funds as a way to diversify and protect their holdings. Consider, for example, an instance in which the stock market plummets overnight.
Unlike the stock market, which would immediately lose tremendous value, real estate portfolios tend to continue marching on. Rents continue to be paid and profits returned to investors. While the real estate portfolio may eventually take a hit, there is not the same correlation to other asset classes which can experience more drastic, momentary ebbs and flows.
What Is A Real Estate Investment Group
A real estate investment group refers to a business that focuses the majority of its efforts and capital on real estate. In search of profits, real estate investment groups may choose to buy, renovate, sell, or finance properties. Real estate investment groups commonly buy out multi-unit properties, selling units to investors while taking responsibility for administration and maintenance of the property.
Typically, real estate investment groups either do not elect or do not qualify to be a real estate investment trust .
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Pros: Paying upfront significantly improves your opportunity to purchase real estate since it removes any financing question doubts in the seller’s mind. Paying cash enables you to acquire properties at significant discounts in exchange for the convenience cash offers. In addition, paying cash saves buyers a lot of money in interest expenses that come with private, hard-money or conventional loans.
Cons: This one is all about risk versus reward. Paying in cash is a safer, more conservative approach, but it caps your potential gains. Think about it this way: If you invest $250,000 in cash and then rent the property for $2,000 per month, youll see $24,000 in gross revenue per year, or a 9.6% gross return on investment. Alternatively, if you make a $50,000 down payment, then take out a 30-year mortgage at 5%, youll pay $977 per month in principal and interest. Rent that property for $2,000 and subtract the mortgage payments, and you have an annual gross revenue of $12,276 nearly 25% gross return on the initial $50,000 investment in just the first year. Although this explanation is oversimplified, it illustrates the leverage that your money can give if you choose other financing options.
Paying with cash certainly provides security and stability, but removing the risk dramatically reduces the potential reward.
Option 2: Finance your property with a private individual lender.
Option 3: Finance your property with hard-money loans.
Which option is right for me?
Real Estate Limited Partnerships
A real estate limited partnership is similar to a real estate investment group. It is an entity formed to buy and hold a portfolio of properties, or sometimes just one property. However, RELPs exist for a finite number of years.
An experienced property manager or real estate development firm serves as the general partner. Outside investors are then sought to provide financing for the real estate project, in exchange for a share of ownership as limited partners. The partners may receive periodic distributions from income generated by the RELPs properties, but the real payoff comes when the properties are soldwith luck, at a sizable profitand the RELP dissolves down the road.
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Can Ira Funds Be Invested In Real Estate
Investors can hold real estate property in a self-directed IRA, i.e., an IRA that is not associated with any brokerage firm, bank, or investment company. The IRA custodian, or other entity responsible for record-keeping and IRS reporting, must accept alternative investments. The property must be held for investment purposes only the investor/investors family members cannot use it. The investor must pay cash for the property, and all ownership expenses must be paid out of the IRA.
How To Invest In Reits
An individual may buy shares in a REIT, which is listed on major stock exchanges, just like any other public stock. Investors may also purchase shares in a REIT mutual fund or exchange-traded fund .A broker, investment advisor or financial planner can help analyze an investors financial objectives and recommend appropriate REIT investments.
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Property Value Increases And Rental Income Are Just Two Ways To Profit
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Whether you’re curious about the investment potential of real estate or you’re simply sick of infomercials promising little-known ways to “profit from your property,” it’s worth learning, for real, how real estate creates wealth.
Rather than providing obscure strategies for investing in real estate or a primer on homeownership for first-time buyers, this article will focus on how to make money through real estate. It will cover both the basic methods that haven’t changed in centuries, no matter what kind of gloss the gurus of the moment try to put on them, as well as specific opportunities that have arisen relatively recently.
Invest In Real Estate Through Online P2p Platforms
Account Minimum
$1000
P2P investment platforms are springing up that are based on real estate investing. The process is commonly referred to as crowdfunding. Thats where groups of investors get together to pool money for specific real estate related investments.
These platforms provide you with a way to invest in real estate online through different types of real estate, and in different ways. Your investment isnt as liquid as it would be if you invested in mutual funds for ETFs, but its less complicated than real estate LPs.
Theyre probably closest to REITs, but you have more control over what it is you invest in. With a P2P platform, you can select the deals that you invest in.
This also gives you an opportunity to diversify a relatively small amount of money across many different deals.
Real estate centered P2P crowdfunding platforms have only been around for a few years. But theres already a wide variety of platforms that give you the opportunity to choose how and where you want to invest.
Meanwhile, new platforms are coming online all the time.
If you are not sure what is the best way to invest in real estate for you, these next options are definitely worth giving a quick Google search.
Here are 3 of the best ways to invest in real estate online:
RealtyShares enables you to invest in either commercial or residential real estate projects. In fact, a lot of investors have titled RealtyShares as the Lending Club of Real Estate.
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Federal Housing Authority Loans
FHA loans are government-sponsored loans that incentivize people to purchase a home by offering a borrowing option in which the buyer needs to put down only 3.5%. The FHA doesnt loan the money it guarantees the loan for the lender. Since the FHA takes on some of the financial risk by insuring the payment of the loan if the borrower defaults, its easier for borrowers to qualify for an FHA loan than a conventional loan, and the lender is able to offer a competitive interest rate.
Complete The Transaction And Grow Your Wealth
Once youve performed due diligence, youll need to finish up the paperwork and fund the loan. The company youve hired as a trustee will help you navigate this process, which is far simpler than it sounds. Once the loan is funded, you can sit back and watch your wealth grow!
Taking your RRSP funds out of the bank and putting them to work can help you maximize your assets and ensure youre reaping the best possible returns. Investing RRSPs in real estate is an excellent way to sit back and watch your wealth grow with very little activity required on your behalf.
The RRSP is an excellent tool savvy Canadian investors can use to maximize their wealth and retire in comfort. If youre looking for a creative way to leverage your RRSP, consult with a tax attorney or real estate industry professional to learn more about investment opportunities available to you.
On the flip side of all this, remember you can partner with another real estate investor and use their RRSP to fund your next real estate venture!
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What Are The Best Types Of Real Estate Funds To Invest In
For accredited investors, private equity real estate funds provide a number of important benefits that are not available from other types of real estate investment vehicles, including preferred returns and tax advantages. For individuals who are seeking exposure to real estate and have at least $50,000+ to invest, this is quite often the preferred approach to investing in real estate. Private equity real estate funds often specialize in particular types of real estate projects, so investors can compare various funds to find one that meets their goals and preferences.
For investors with less capital to invest that do not meet the accreditation standards, there are approximately 225 REITs traded on stock exchanges in North America, hundreds of real estate mutual funds and over 30 real estate ETFs. Some hold U.S. properties only, and others are international. Some specialize in a particular category of real estate while others invest in a broad range of property types. In choosing a REIT or fund, focusing on recent performance is not informative, as returns vary over time and real estate is cyclical in nature while one sector may have done well in the past year, another will be stronger the following year. We offer these criteria to consider when evaluating publicly traded real estate investment vehicles.
Key Criteria:
How Does Real Estate Investing Compare To Stock Investing
Stocks and real estate arent worlds apart. In fact, they share several similarities. Both can provide you with cash flow, passive income, and investment gains in the form of increased share prices or higher property value. Taken together, they can help you hedge market risks, as stocks may still perform well during a real estate crisis and real estate property could perform well during a stock market crash.
But beyond that, stocks and real estate have several key differences that might make one more suited toward your investing style. Heres how they compare.
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Hello Who Are You And What Business Did You Start
My name is Greg Salley, Im a founder and Managing Director of Equity Residences.
Equity Residences is a luxury real estate investment fund. We offer a way for accredited investors to own a portfolio of luxury vacation homes both for personal use and as an investment.
Our Equity Platinum Fund is raising $50 million to acquire twenty residences ranging from $1.5M to $4M, which are owned debt-free. We create value for investors in how we buy and upgrade the homes and investors also benefit from appreciation over time. We rent homes with income used to offset operating costs.
A minimum investment of $161,500 gives an investor access to our entire portfolio along with thousands of affiliate homes. Investors can stay at any home within the portfolio rent-free. We sell the homes after 10 to 12 years and distribute the profits back to the investors.
We currently have over 200 investors and $40 million under management.
Working With Partners To Fund Real Estate Deals
Many newer investors team up with a more experienced partner investor in order to be able to fund a real estate deal successfully without the burden of debt. This involves finding another investor that has the funds available and convincing them of the value of joining in on the deal you have canvassed. This can be easier said than done. Bear in mind that working with a partner is not for everyone. Some individuals prefer to work alone, while others prefer to have another person providing financial and managerial input.
For many investors, working with another, more experienced investor is a great way to get access to capital while learning the ropes and bettering their own investment portfolios. This arrangement would also mean that there is someone else in the deal taking on a portion of the risk and who is able to share in the responsibilities. The key is that if one party is not bringing funding to the equation, they still have to bring something of value to the deal this could be the lead for the property, a network of buyers or something else.
There are definite benefits to a strategic partnership, like sharing networks between parties and having more resources available to go around. Having a partner can also come with its own set of challenges. Any profits made from the venture will have to be shared, tax structures can be slightly more complicated, and decision making will need to involve all parties that have a stake in the business
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How To Fund A Real Estate Investment
Investors can purchase shares in real estate mutual funds, real estate ETFs and REITs that are listed on a public stock exchange through an online or full-service brokerage account. These funds typically have a low minimum investment ranging from $1,000 – $2,500. Private real estate investment funds and private REITs typically have much higher minimum investments, often $100,000 or more. Accredited investors taking positions in Regulation D Rule 506 private equity funds may invests as an individual or through IRAs, 401Ks, trusts, brokerage accounts, and various entities.
