How to Efficiently Invest in Real Estate
We put on an educational event in mid-July that provided a quick overview of a few different options for investing in real estate:
1) BRRRR method (buy properties)
2) Private Real Estate partnerships and REITS (Fundrise, etc.)
3) Delaware Statutory Trust (DST)
4) Publicly-traded REITs
5) REIT Fund (mutual fund or ETF)
6) Interval Fund (hybrid between Private REIT and public REIT fund)
If you’re a person that is eager to add value to your real estate investments, and you want to use leverage and maximize return, then option 1 is likely for you. This gives you the best opportunity to make money, but is also the most risky initially, as it lacks diversification.
For those of us who are too busy or not skilled enough to add value to a property— or are risk averse and prefer diversification and less use of debt in our investments—we should consider which of options 2-6 give us the most efficient exposure to real estate.
The only time I’d recommend #2—a private real estate investment (non-traded REIT)—is when you are ready to execute a tax-free 721 Up-REIT exchange. This is for folks wanting to 1031-exchange for the final time, and are ready to simply collect rents from a diversified real estate portfolio that is easily inherited or sold over time in customizable amounts.
Option 3—DSTs—are a great option for folks who are ready to offload the landlording/property management headaches of owning investment property. I typically only recommend DSTs for 1031-exchanges.
Option 4: We don’t normally recommend investing in individual publicly traded REITs, as it is similar to stock-picking. I’ve attempted that, and my experience shows that broad diversification to an asset class via rules-based (index) ETF is most efficient, which segues perfectly into options 5 and 6.
Option 5: If you want to simply and efficiently invest cash or IRA funds into a diversified real estate portfolio, REIT ETFs are a great option. One caveat is that REIT funds have volatility more aligned with stocks than to your primary residence.
Option 6: For investors who want to invest in real estate either with cash or via their retirement account, interval funds provide a diversified real estate portfolio with subdued volatility. Interval funds are a great hybrid solution that mixes options 2 and 5. The two downsides are the management expense, as well as the 90-day liquidity provisions (the exit interval).
If you’re excited about real estate, but unsure the best way for you to invest, please reach out to us.