There are more ways than ever to become a real estate investor. The most common ways to invest are buying a share of a REIT, giving a crowdfund more money than a share of stock to purchase property or going directly in owning an apartment. The most prevalent barriers to entry include access to capital, risk tolerance and involvement. I’ve detailed the three common real estate investing methods and why direct ownership is my preferred route.
REITs: just another stock to buy
Anyone can invest in multifamily housing by purchasing a share of a real estate investment trust (REIT). You can invest in one or many of the 167 different REITs. As an investor, you have zero control of the purchasing and operation decisions, and you may not know where the assets that are acquired are located, but your risk is spread. With a REIT you also have the liquidity that traditional commercial real estate won’t provide. It is a good start to the investment side of properties.
Crowdfunding: a micro version of investing in a REIT
In a crowdfund, there are several people involved, and usually not connected in any way. Their pool of money is used to purchase an investment property that will likely produce a yield to each individual investor. A third-party investment company pools capital together with a target equity raise. When that raise is achieved, the third-party company finds a deal (usually a value-add) and begins implementing the capital. A negative to that effect is that in the event the group can not hit their target, the capital must be returned and no transaction moving forward. The investment strategy varies by company but ultimately will pay a distribution to you the investor, per the predetermined agreement. Crowdfunding allows an investor to contribute a smaller than the traditional amount of capital into a deal like a REIT, but more of a direct tie to the actual transaction.
Direct ownership: the purest form of being a real estate investor
Whether you purchase the building as a sole proprietor, an s-corporation or most often an LLC, you have to have the cash on hand or access to capital to purchase the apartment. This path, unlike the others, does require the investor working with several people: attorney, bookkeepers, accountants, hiring property management and potentially dealing with lenders.
I am biased because this is the path I chose and have been happy with that direction. However, I’m in the industry, have access to a lot of great resources and have the time. Very few are so lucky. If the investor just wants to get started, has little time and capital, it is worth looking into a REIT or crowdfunding. However, investors can see a larger return on capital, better tax benefits, long term growth and overall greater success in commercial real estate, by taking on the direct path.
No matter which method you use to invest in real estate, it is worth talking with people, looking at deals and understanding this whole world of multifamily investing.