Burning to start investing in real estateš„µš¤Ŗ?! No time, no powerful network, no big bucks nor crucial experience?! FOMO š¤?! Well if you aināt Buffet or Dalio then piggyback on the moneypot and #hack your way into it...
Talk Dinerošø?!
Before anything else YES, Warren Buffet, and Ray Dalio both invest in real estate big time. Not directly though but rather through stocks and funds. Keep reading youāll get it š. Now girl, as we have stated many times before the only way to really build wealth is to buy assets that produce money. The rich do not, we repeat DO NOT work for money, money works for them!
By far the greatest problem for everyone starting or wanting to start a business, real estate, or investing in the stock market is the darn dinero, gelt, money š°š°. Once you have enough assets as we mentioned earlier you will be able to create money out of thin air & at will with (re-)financing options, because banks love assets. Banks will loan you almost an infinite amount to acquire and operate assets once you have a proven record.
The irony š¤Øš is once you have enough money, you will never need the money to make more money, that is how the financial system works. But to start and get things going you do need money, a lot of money š°!
In flip to fortune, we gave you a clear path on how to start from scratch with $0 and make money to invest and build a multi-million investment portfolio.
We pointed out different routes and options after you get the first grip of creating money out of thin air with āarbitrage flippingā, which is actually hacking a business startup from scratch. Instead of building a business and making all the massive time & financial investment commitments to develop products, services, marketing, and more, you just resell products for a profit that already do well. The fastest way to instant money. You can now choose to use the money to buy and/or build actual businesses and invest for true wealth. Remember a sales job in any shape or form and even those with high numbers of cash coming in are not true wealth. A well-known analogy with investors is that of the dancing bear, whenever the music stops and the bear doesnāt dance anymore the money stops! Donāt be a dancing bear. That is why actual businesses (that donāt rely on you being the dancing bear) and investing are the ultimate progression to building wealth. That and owning a bank š.
As you might have guessed, investing also requires ādineroā a lot of it ššø until it does not. Always remember banks will give you all the money you need once you proved you know how to handle money!
What many āscam & sham gurusā in the entrepreneurial space donāt want you to realize is the equation:
For every $/ā¬ 1.000 in monthly desired cash flow, you will need to have an equivalent of $/ā¬ 100K invested with an approximate 10ā12% ROI annually.
That is why it is of the uttermost importance to understand financials and how to achieve a great return on your investments. They donāt want you to realize this because they wouldnāt be able to sell you any of their āget rich quick, with no workā garbage schemes. The best investment you can ever make is in yourself! Yes, invest the time, the money, and the effort to understand the financials first and become a sophisticated investor! Either you pay upfront with sweat equity or youāll pay with regret and pain of being the sucker and losing all your hard-earned money later. You decide, choose wisely š§ā¦
In our Blogs, we describe the many ways to be an active investor, which implies starting real businesses in real estate and actively investing in real estate. All of this requires a lot of time, effort, knowledge & money to start. But, there are also ways to āpassivelyā start investing in real estate, hacking investing in real estate if you will. š„³š
Traditionally, equity investing was only open to accredited investors. Accredited investors include banks, pension plans, insurance companies as well as affluent, sophisticated investors. For you as an individual to qualify as an accredited investor:
you have to earn at least $200,000 or $300.000 combined in the two past years and expect to earn the same the current year;
you have to have a net worth that exceeds $1,000,000 (excluding your primary residence).
Being an accredited investor opened up opportunities to invest in asset classes such as real estate syndications, real estate crowdfunding, venture capital, and hedge funds. The Securities and Exchange Commission (SEC) created these criteria in an effort to protect new or inexperienced investors from buying into high-risk projects or having insufficient reserves, in the event of a loss. While these criteria aimed to protect they also for a long time excluded non-accredited investors (those who did not meet the criteria above- those trapped in the rat raceā¦ which kept them trapped.). Sounds familiarš¤Ø? With access to greater opportunities and greater rewards, comes higher growth, and true wealth. Don't let them fool you with risk avoidance, you don't avoid risk you mitigate the risk that is how money is made!
In the next segment, we are going to break down and dive a little deeper into three ways of passive investing you can start on a small budget as a non-accredited but sophisticated investor until you become an accredited investor. You can start small and keep growing infinitely ā even if you just want to remain a passive real estate investor for life:
Online Crowdfunding
REI Groups / Syndications
REITs
Online Crowdfunding
The idea behind online crowdfunding is that many people are willing or able to invest a āsmallā amount, so large sums of money can be raised quite quickly using the Internet and social media to reach a big audience of potential investors. The process of raising money also known as property crowdfunding, real estate peer-to-peer lending, or financing of real estate projects, is done on an online crowdfunding platform.
Crowdfunding offers on one hand companies access to capital that they might never be able to raise and on the other hand investors the ability to become shareholders in a company or in a real estate property they might never be able to fund on their own.
Crowdfunding, Why & Who?
Crowdfunding is right for real estate investors who want a passive income from projects that they would not be able to access or afford on their own. It is also a great option for investors who want to raise money to finance their property (portfolio) and increase their debt exposure outside of the traditional lending and financing structures.
Some of the people that can benefit from this form of investment are:
Investors who want to invest in real estate but donāt have the capital to acquire a property.
Investors who donāt want the hassle of being a landlord.
Investors who are looking for an alternative or diversification to the stock market to ease their way into real estate investing in smaller chunks.
Investors who are interested in investing in real estate projects outside their area, but donāt have the means, knowledge, experience, or logistics to do so.
Even though it is a legit option for investors interested in real estate investment, it is not the right option for those wishing to actually own the asset themselves. It is also not the right option for active investors who want to be hands-on investors and in charge of budgeting, deadlines, choosing the finishes, and managing contractors, and grow their portfolio, network, and experience at the same time.
The Benefits For Investors
You gain access to low-levels of investments with some projects being offered for as little as ā¬/$ 500 -1.000 with increments of ā¬/$5.000 being more the norm.
You can make short-term investments, some ranging between 2 and 48 months
Peer-to-peer lending opportunities with low or no investment fees, which implies a higher return on your side (in Europe the average ROI is 12-14%, the USA anywhere from 4-28%).
Crowdfunding has the benefit of transaction transparency as members know exactly where their funds will be invested.
Crowdfunding offers an opportunity to diversify your investment to various asset classes and countries.
Remember you can start with very small portions but the rewards will be small too. Well, it is a starting point better than doing nothing and it will compound over time! You need to have around 100K invested to attain 1K in monthly cash flow on an annual ROI of 12%. Itās all in the return on investment percentage. The higher the ROI, the higher the monthly cash flow but also probably the higher the risks. You never ever defer any risk, you mitigate them!!
The Benefits For Borrowers
Real estate crowdfunding increases your chances/channels of getting funds while you grow your investor network.
Real estate crowdfunding allows real estate companies in the early stages to start more quickly.
Successful projects from a Real estate crowdfunding platform build your reputation/track-record to use with future professional lenders.
Real estate crowdfunding involves direct marketing that also helps in promoting your real estate business.
Your business can access valuable feedback from your online crowdfunding community.
You can save money and time by using user-friendly Real estate crowdfunding platforms.
Types of Crowdfunding
Equity (Equity-based) Crowdfunding
Equity investment usually provides higher returns than debt investing. When you invest this way, you will receive returns based on the propertyās rental income less crowdfunding platform fees. This is very different from crowdfunding websites such as Kickstarter, where people donate money and do not receive equity for their contributions.
Quarterly pay-outs sent to investors who can also
Earn a share of the propertyās appreciation value in case it is sold, on top of getting the principal back.
The major risk associated with this type of investment is that investors have an equity stake in the property, which means they can lose money if the value of the asset decreases.
Debt (Lending-based) Crowdfunding
Debt investment is the most common route for investors as it is more simple to invest in. In this type of investment, you lend funds to the owner of the property.
Quarterly or monthly payments for loan investment.
You will receive a fixed interest based on the ownerās mortgage loan and the amount that you have invested.
At property pay-out (which is usually a fixed date), you will only receive your invested amount (principal) back.
Where to Find
For full disclosure: "We Only Present Options For Educational Purposes Only. We Do Not Promote Nor Advise Investing On Any Specific Platformā. Please do your own due diligence before investing in any endeavor on any platform and never ever invest what you cannot afford to lose. With all that said here are some starting points to browse around:
USA:
EUR:
This Postās Crucial Crux:
REI- Groups/Syndications
Before there were the Internet and the popular crowdfunding opportunities there were small/medium multi-million Real Estate Investing Groups and big multi-billion Real Estate Syndications mostly to accommodate accredited investors as we defined above. Until the JOBS Act that is š„³, providing many non-accredited investors options to step up onto the plane. It is also always good to know the next growth potential for your investments.
The Jumpstart Our Business Startups (JOBS) Act is a piece of U.S. legislation that was signed into law by President Barack Obama on April 5, 2012, that loosens regulations instituted by the Securities And Exchange Commission (SEC) on small businesses. The JOB Act The law allows non-accredited investors to invest in startups through crowdfunding and "mini-IPOs".
First, it lets startups raise up to $1 million through crowdfunding, which is a form of investing by many small investors pooling their resources.
Secondly, it greatly expands a category under a rule called "Regulation A" (or Reg A+), which allows companies to offer stock up to $ 50 Million in stock each year, without going through the process of registering with the SEC.
source: Wikipedia
Why & Who?
A syndication is a transaction between a sponsor (the investor/business seeking funds) and a group of investors (with a lot of money to spare). As the manager and operator of the deal, the sponsor invests the sweat equity, scouting out the property and raising funds, handling acquisition, and managing the investment propertyās day-to-day operations, while the investors provide most of the financial funds needed. The sponsor is usually expected to invest anywhere from 5-20% of the total required equity capital herself and the participating investors put in the remaining 80-95% of the total equity needed. The more the sponsor invests in the deal, the better for all the investors. As a participating investor, you want the sponsor to have the most skin in the game.
REI-groups or Syndications are mainly for passive accredited investors aspiring to invest substantial capital in real estate but would rather avoid the 24/7 hustle and bustle of active investing and for a smaller financial responsibility with leverage to bigger opportunities while keeping all of the known benefits of tax write-offs, leverage, and a hedge against inflation. Before the Internet, syndications started in lumps of 50 -100K with REI groups allowing for a minimum of 25K participation portions. But with the increasing popularity and rising competition from crowdfunding platformsā transparency, clarity on fees, and ease of use they are being pushed from their high horses and forced to adapt š. Since then more and more are lowering their threshold for non-accredited investors to get in on the party for as low as 5-15K increments! It is also a great way to invest larger sums, grow and diversify a large portfolio passively.
Syndications are structured legally as Limited Liability Companies or Limited Partnerships. The sponsor participates as the General Partner or Manager and the investors participate as limited partners or passive members. The LLC or Limited Partnership structure is very similar to the setups of other private funds in the Venture Capital, Private Equity, and Venture Debt space. Such legal entities are there to protect both the Sponsor and the Limited Partners if the deal goes south.
The Benefits For Investors
Lower Financial Risk In A Greater Asset. The Legal Structure of Syndication with a general partner and passive partners arrange for the management risk in the investment to be with the general partner. The passive investor only invested a limited amount, and their greatest risk is only losing their original investment.
Exceptional Expertise & Knowledge. With real estate syndications, real estate investors get to take advantage of the fact that they can rely on the knowledge of a group of investors, and experienced, professional teams with a wide range of backgrounds to manage every aspect of the process and property. They can also use the opportunity to learn different aspects and processes concerned.
Economy of Scale With more investors, there is more capital or money available upfront. This means bigger down payments for bigger properties as well as more available money for rehab, upgrades, and maintenance.
Diversification. Because of the lower required participation, it is easier for investors to allocate and spread their money in multiple asset classes and markets.
āāāConsistent Returns, Lower Volatility & Tax Benefits. Most syndications provide steady, fixed quarterly payout in cash flow, while providing also consistent appreciation and exit pay-outs and tax deferrals and depreciations off-sets to capital gains this might not be the case with smaller REI-groups.
Entirely Passive. Because real estate syndication consists of a real estate limited partnership, you are a business entity and have limited liability when confronted with losses but enjoying owning tangible assets by receiving a share of ownership, inflation hedge through cash flows as limited partners while avoiding daily real estate management issues.
The Benefits For Borrowers
More Capital and Faster Growth. The Syndication has many equivalent benefits to the borrower as to the investor. It empowers borrowers to build and maintain bigger portfolios of investments than with only traditional banking financing. The collective group of investors has a higher net worth and a larger network than the borrowers working on their own. Syndications also have a more diversified portfolio and a greater ability to pool resources including skills, contacts, and experts.
There are at least 12 ways a sponsor gets paid higher returns through several management and operational monthly fees on top of the quarterly payouts.
Distributions. Syndicators typically earn between 25% and 50% of distributable cash generated from operations, refinance, or sale of a property, which are paid as a direct split between the members and the syndicator (i.e., 65/35) or as a preferred return.
1. Operations
2. Refinance
3. Sale of the property
Fees. Fees are an expense of the syndication and are collected by the syndicator on a monthly, quarterly, or annual basis. The type of fees a syndicator may earn are:
1. Acquisition fee (1% to 3% of the purchase price)
2. Asset management fee (1% to 2% of gross collected revenue)
3. Refinance fee (1% to 2% of the refinance loan amount)
4. Disposition fee (1% to 3% of the sale price)
5. Loan guarantor fee (1% to 3% of the loan amount or a flat fee)
6. Interest on loans made to the company (8% to 12% of the loan amount)
Real Estate Brokerage Fees. A syndicator who is a licensed real estate broker or agent in the state where the property is located may also earn commissions or fees for providing licensed brokerage activities to the syndication, including:
1. Commissions on purchase of the property
2. Resale commissions
3. Property management fees
Types of Syndication
There exist several types of real estate syndications. The two most common are:
The specific offering. In a specific offering, the sponsor identifies one or more specific assets for acquisition and raises the capital necessary to carry out the acquisition and operation of the specific asset(s). In this case, the investors are intimately aware of the specific asset or assets under management. This is the most common type of syndication, especially for sponsors who are relatively new to the game.
The blind pool. The second most common type of syndication is the blind pool. In a blind pool, the sponsor presents a business plan to investors, explaining how she will acquire and operate properties. The sponsor does not identify the specific properties. Investors make their investment decision primarily on the business plan and track record of the sponsor. In order to run a blind pool, a sponsor must have a strong background and proof of performance, otherwise, she will struggle to raise capital.
Where to Find
The best way to find real estate syndication opportunities is to get out there and start connecting and talking to people in the real estate syndication space (small in-crowd) or Google online for investing opportunities you will quickly find many offerings of syndications, it's a network game. Pick-up golf ā³.
We will repeat over and over again: "We Only Present Options For Educational Purposes Only. We Do Not Promote Nor Advise Investing On Any Specific Platformā. Please do your own due diligence before investing in any endeavor on any platform and never ever invest what you cannot afford to lose. With all that said here are some starting points to browse around:
USA:
EUR:
This Postās Crucial Crux:
REITs
A REIT (pronounce read <riet>), or Real Estate Investment Trust, is a company that owns, operates, or finances income-producing real estate. Modeled after mutual funds, REITs historically have provided investors of all types regular income streams, diversification, and long-term capital appreciation by investing in large-scale, income-producing real estate like office buildings, shopping malls, apartments, hotels, resorts, self-storage facilities, warehouses, cell towers, and mortgages or loans.
A REIT is a fancy name for a tax-advantaged company that invests in real estate. In exchange for not paying tax at the corporate level, theyāre required to pay out 90 percent of their taxable income as dividends. Those payouts make them popular, especially with older investors, and REITs usually offer among the highest yields in the market. By law, REITs must invest at least 75 percent of their assets in real estate and derive at least 75 percent of their gross income from rents or interest charged on mortgages for real estate.
REITs can own almost any type of real property. However, they tend to specialize in certain sectors, preferring to focus on one or two areas, because executives are able to utilize their in-depth knowledge and professional connections. Plus, investors tend to value focused companies more highly than diversified businesses, so you know exactly in what specific category you are investing in and therefore you are able to diversify very specifically and focused.
Why & Who?
REITs provide a way for investors to earn a share (cash flow) of the income produced through commercial real estate ownership, without actually having to go out and buy commercial real estate. An investor 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 (ETF).
The greatest upside of REITS in opposite to Syndications or Crowdfunding is the incredible earnings potential while āmaintaining liquidity.ā As an investor, you can trade your shares anytime on the stock market for cash š°.
Investing in REITs can be done by nearly any investor, regardless of portfolio size, because of their availability in mutual funds and ETFs. If you're just starting you can consider a REIT Index Fund.
The Benefits For Investors
Guaranteed Dividends. REITs must by law pay out at least 90% of their income as dividends or face penalties such as paying corporate taxes. Yes, you heard it right, they pay zero, nada on corporate taxes. This requirement is the number one reason income investors buy REITs. They also must invest at least 75% of total assets in real estate, cash, or U.S. Treasuries & derive at least 75% of gross income from rents, interest on mortgages that finance real property, or real estate sales.
Highly Liquid. They're conveniently packaged into shares that can be easily bought and sold. There are also REIT mutual funds and ETFs (exchange-traded funds) that diversify by investing in many individual REITs. Traditional real estate has a long enter-and-exit process, so your investment isn't liquid and participations in crowdfunding and syndications arenāt liquid either.
Low Threshold. You don't need a lot of money to start investing in a REIT. And owning a REIT index fund gives you exposure to the real estate asset class with very little money.
Fully Passive Investment. Directly owning and managing a property is a business and requires time and effort. REIT shareholders do not own the property or mortgages represented in its portfolio. As such, they also avoid the headaches many property owners and managers experience, such as maintaining or developing the property, providing landlord services, and collecting rent payments, to name a few. REITs truly are passive investing, like mutual funds.
Low Stock Market Correlation. REITs historically have a low correlation to other asset classes. But always check for market correlation which makes prices for some REITs go up and down with corporate stocks, regardless of whether the underlying values of the properties within the REIT have changed. This makes it easy to create a diversified investment portfolio by adding REITs.
In this part, we will skip the Benefits For Borrowers for being obviously mainly tax-exemptions and leverage of capital to grow their portfolio and hone in a little bit on the downfalls involved.
Drawback For Investors
Market Bubbles & Declining Value Properties. As we learned from the housing bubble that burst in 2007ā08 and the unprecedented development of the Covid-19 in 2020 for Retail, Shopping Malls, Restaurant, and many more commercial real estate categories alike, real estate does not always go up in value and can be impacted or wiped out. When choosing a REIT, be mindful of the growth prospects of the industries, the long term cycles, property types, and geographical locations it is targeting.
Fees and Markups. While REITs offer the advantage of liquidity, trading in and out of a REIT has a high cost. Most of the fees charged by a REIT are paid upfront. These fees are run roughly 20ā30% of the value of the REIT. This takes a sizable chunk out of your potential returns. And because REIT prices are set in the public markets, they can trade at a significant premium to the real value of the underlying assets they hold.
Gains Taxed at Ordinary Income Rate. As we mentioned, REITs have to pay out 90% of their income to their shareholders. This gives many REITs attractive yields. But unlike stock dividends, which are currently taxed at a maximum of 15% in USA and even lower to zero in EUR, REITs are taxed at your ordinary-income rate. So in most cases, you are best to invest in REITs in tax-deferred accounts like a self-directed IRA or investment business to minimize taxes.
Types of REITS (how they are backed)
Equity REITs. Most REITs are equity REITs, which own and manage income-producing real estate. Revenues are generated primarily through rents (not by reselling properties).
Mortgage REITs. Mortgage REITs lend money to real estate owners and operators either directly through mortgages and loans, or indirectly through the acquisition of mortgage-backed securities. Their earnings are generated primarily by the net interest margināthe difference between the interest they earn on mortgage loans and the cost of funding these loans. This model makes them potentially sensitive to interest rate increases. So take good notice of exorbitant promised projected returns under the unprecedented current low-interest rates and what it means when they go up in the near future!
Hybrid REITs. These REITs use the investment strategies of both equity and mortgage REITs.
Category of REITS (how their stocks are traded)
Publicly Traded REITs or REIT Funds. Shares of publicly-traded REITs are listed on a national securities exchange, where they are bought and sold by individual investors. Just use your broker account and buy REITS like you would stocks. They are regulated by the U.S. Securities and Exchange Commission (SEC). A publicly traded REIT fund offers the advantages of publicly-traded REITs with some additional safety. REIT funds typically offer exposure to the whole public REIT universe, so you can buy just one fund and get a stake in approximately 200 REITs that trade publicly. These funds comprise all REIT sub-sectors, such as residential, commercial, lodging, towers, and more.
Public Non-Traded REITs. These REITs are also registered with the SEC but donāt trade on national securities exchanges. As a result, they are less liquid than publicly-traded REITs. Still, they tend to be more stable because theyāre not subject to market fluctuations.
Private REITs. These REITs arenāt registered with the SEC and donāt trade on national securities exchanges. In general, private REITs can be sold only to institutional investors. Private REITs may have an investment minimum, and that typically runs from $1,000 to $25,000, according to NAREIT, the National Association of Real Estate Investment Trusts. Additional Risk: Private REITs are often very illiquid, meaning it can be difficult to access your money when you need it. Second, because theyāre not registered, private REITs donāt have to have any corporate governance policies. That means the management team can do things that show a conflict of interest without much, if any, oversight.
As real estate investment trusts (REITs) have grown as an asset class, they've expanded into new property types, meaning investors can gain exposure to most industries via real estate. There are currently 13 different subgroups covering various sectors. These include:
Retail.
Technology (data centers and infrastructure like cell towers).
Housing (residential home rentals and lumber for homebuilding).
The hospitality sector.
Healthcare.
The industrial economy.
This means investors can build a diversified portfolio via REITs. Further, they can use REITs to invest in emerging tech trends like 5G, streaming, the cloud, and other fast-growing sectors like e-commerce.
Where to Find
SEC recommends that investors should be wary of anyone who tries to sell REITs that aren't registered with the SEC. It advises that "You can verify the registration of both publicly traded and non-traded REITs through the SEC's EDGAR system. You can also use EDGAR to review a REIT's annual and quarterly reports as well as any offering prospectus." It's also a good idea to check out the broker or investment advisor who recommends the REIT. The SEC has a free search tool that allows you to look up if an investment professional is licensed and registered.
SEC's EDGAR system (verify REIT)
Free search tool (verify broker/advisor)
source: Investopedia.
Okay if you've followed along you know the drill so letās get it out of the way š: "We Only Present Options For Educational Purposes Only. We Do Not Promote Nor Advise Investing On Any Specific Platformā. Please do your own due diligence before investing in any endeavor on any platform and never ever invest what you cannot afford to lose. So donāt say we didnāt warn you like a trillion times, chill, donāt get greedy, do your freaking due diligence, confirm, check again, verify and then start browsing:
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Get YOUR unfair advantage, Now!
If you have been reading more on our Blog you probably, know by now that real estate has long been the playground for the rich and well connected! Itās also been the best performing investment in modern history. On top of that, real estate investing offers a set of unfair advantages (tax exemptions, endless tax- deferral, phantom depreciation, infinite leverage, inflation hedging, forced and time appreciation, very high ROI ) that are completely unheard of with any other investments. Real estate is truly the queen of all asset classes.
In this Internet era as we stand in 2020, the barriers to entry for real estate investing have come crumbling down just like AirBnB did to the hotel barons and Uber did to the taxi overlords. With price transparency, flexibility, and information availability at lighting speed you donāt need to be invited to the table or have extended networks all you really need is your laptop or phone and some cash to spare.
Now itās possible to build REAL wealth through real estate at a fraction of what it used to cost, meaning the unfair advantages are now playing to your advantage. You just have to look at the sectors of the real estate market that are hotš„. Which booming sectors of the economy, in general, can be tapped into via real estate? As an example, healthcare is one of the fastest-growing industries in the U.S. and the whole world really, as we are all "home" -bound during this Covid-19 Pandemic. Look especially to the growth of medical buildings, outpatient care centers, elder care facilities, and retirement communities to name a few. Warehouses for use as Datacenters and Distribution Centers are great options for the booming e-commerce sector too.
Don't Write-Off Active Investing
source: MSN Money, Nareit (National Association of Real Estate Investment Trusts)
While the richest real estate investors made most of their money owning and developing commercial real estate, REITs have also done an excellent job enriching investors over the long term. Since Nareit began tracking REIT performance data in 1972, they've routinely outperformed the S&P 500. Overall, the FTSE Nareit All Equity REIT Index has produced a 13.3% total return versus 12.1% for the S&P 500 from 1972 to 2019. Meanwhile, REITs have beaten the market average 15 of the last 25 years. The implication here is that REITs can be a superior investment over the very long term.
Investment managers have performed many studies on Crowdfunding, Syndication and REITs alike to determine how much exposure investors should have to the sector. On average, they've concluded the optimal allocation should be between 5% to 15% of an investor's overall portfolio. On one hand, having some "passive" exposure can increase a portfolio's risk-adjusted returns. However, having too much allocation to "passive investing" yields higher volatility. Two major factors play an outsized role in especially REIT returns and volatility:
interest rates: Usually, when interest rates rise, it causes real estate values to decline. That's because rising rates make it more expensive to finance real estate debt, and yield-seeking investors shift to lower-risk income assets like bonds. Conversely, falling interest rates can have an outsized positive impact on REITs, since they can refinance higher-cost debt, which should boost their NOI and property values.
cyclicality: Real estate has four phases of its cycle: recovery, expansion, hyper-supply, and recession. Values rise rapidly during the first two phases before tumbling as supply outpaces demand, weighing on occupancy levels and rental rates. This cyclicality can cause REITs to be very volatile, which has been the case over the past few years. For example, the sector went from expansion in 2019 to hyper-supply and recession in 2020 because of the COVID-19 outbreak. That caused wild swings in REIT performance -- they went from delivering strong total returns of +28.7% in 2019 to an abysmal -18% total return so far in 2020.
The world's wealthiest investors owe the bulk of their fortunes to real estate. The sector has served many billionaires (with a B) and quite a few more multimillionaires over the years. As their success shows, concentrating on the industry can be extremely rewarding but remember the richest real estate investors made most of their money "owning and developing" (commercial) real estate to truly enjoy the full spectrum of tax advantages, appreciation & leverage.
So don't' write active real estate investing off just yet, but balance your portfolio out! Remember the money game is best played when using all of the available asset classes to your advantage.
Donāt let the seemingly daunting tasks of property management or the soaring prices of owning real estate of any kind spookš» you away from financial freedom. Invest in your most valuable asset, your financial education, and use the Internet and real estate investment platforms for crowdfunding, REI groups, syndications, and REITS to dip your toes with a small participation as a passive investor. Piggyback on the experienced, big institutional investors and #hack your way into real estate investing. Take control of your destiny and start making your money work for you, today!
Welcome to RealEstatz, start your journey to financial freedom today. Join us!#Free4Real
This Postās Brilliant Books:
The millionaire real estate investor
The Hands-Off Investor: An Insiderās Guide to Investing in Passive Real Estate Syndications
Crowdfunding Real Estate: The Next Generation of Property Investing
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