Real Estate Fund Investment: A Beginner's Guide To Success

Real estate is a common investment choice, but it can be a scary one for a lot of people. And while the intricacies of real estate investing extend far beyond the familiar domains of residential properties and commercial buildings, there are more than just two ways to invest in real estate.

One way to invest in real estate is through real estate investment trusts (REITs). REITs are companies that own, develop and manage income-producing real estate. They are required by law to disburse at least 90% of their taxable income to shareholders in the form of dividends. In addition to individual REITs, investors can purchase shares of exchange-traded funds or mutual funds that hold one or more REITs in their portfolios.

Another way to invest in real estate is through private real estate offerings. Similar to private equity and venture capital funds, these structures allow for tailored investments in skilled management teams undertaking complex projects. Private real estate funds offer investors more choice in selecting a manager and investment theme that fits their risk and exposure profiles.

There are also online real estate investing platforms, also known as real estate crowdfunding, that connect investors to real estate projects. These platforms tend to be illiquid with lockup periods and management fees that reduce profits, but they give investors the opportunity to diversify into real estate without putting up a large stake.

For those with DIY skills and the time to manage properties, buying and managing rental properties is another option. This requires a large down payment and substantial cash on hand to finance upfront maintenance and cover periods of vacancy or non-payment. However, once the property starts bringing in cash, it can be leveraged to acquire more properties and generate multiple income streams.

Finally, for those who want to own rental real estate without the hassle of managing it, there are real estate investment groups (REIGs). REIGs are similar to small mutual funds that pool money from multiple investors to buy or build rental properties. A company then collectively manages all the units, handling maintenance, advertising vacancies and interviewing tenants in exchange for a percentage of the monthly rent.

Rental Properties

Financial Considerations

Before investing in rental properties, it's important to assess your financial situation. Ensure you have an emergency fund, address any high-interest debt, and set aside a portion of your income for retirement. It's also crucial to have sufficient funds to cover maintenance, insurance, and mortgage payments between renters.

Understanding the Responsibilities

Being a landlord comes with its own set of challenges and risks, including fluctuations in rental prices and the need to select reliable tenants. It's important to be prepared for potential eviction processes and the emotional aspects of dealing with tenants.

Property Type and Location

When choosing a rental property, consider your goals. Do you want a property that you can occasionally use yourself, or are you solely focused on generating passive income? Determine if you prefer a property close to where you live or one in a different geographic area. Additionally, research locations with low property taxes, good school districts, and walkable amenities such as restaurants and parks. A growing population or revitalization plans can also signal potential investment opportunities.

Property Management

You'll need to decide whether to manage the property yourself or hire a property management company. Managing it yourself can be time-consuming and emotionally draining, especially when dealing with maintenance issues and tenant screening. Property management companies can provide valuable services, but they will charge a fee, typically between 8% and 12% of collected rents.

Legal and Tax Considerations

Familiarize yourself with landlord-tenant laws in your state and locale, including security deposit, lease requirements, eviction rules, and fair housing laws. Consider setting up a separate bank account or a limited liability company (LLC) to handle rental income and expenses. Consult a tax professional to take advantage of deductions and reduce your taxable income.

Common Mistakes to Avoid

Be cautious and well-informed before investing in rental properties. Avoid assuming full occupancy and prepare for potential gaps in tenants, late payments, or unexpected repairs. Always check with homeowner associations and city regulations before renting out a property. Be mindful of your renovation budget and avoid taking on too much debt, which can eat into your profits. Start with one property to gain experience before expanding your rental portfolio.

Financing Options

Financing a rental property usually requires a larger down payment compared to buying a primary residence. Lenders typically charge higher interest rates due to the higher default rate on rental properties. You may need a minimum credit score of 620 and a down payment of 15-25% for an investment property mortgage. Explore different financing options, such as traditional mortgages, FHA loans, or VA loans, or even "seller financing" where the property owner serves as the lender.

Calculating Returns

To determine if a rental property is a good investment, estimate the potential return on investment (ROI). Consider market rental rates, vacancy rates, maintenance costs, and other variables. Use tools like the 1% rule, which suggests that if your monthly income from rent is around 1% of the purchase price, it could be a viable investment. Remember that there are many variables at play, and rental property investments carry a risk of loss, just like any other type of investment.

Real Estate Investment Groups (REIGs)

A real estate investment group (REIG) is a company that pools capital from several investors to invest in real estate. REIGs are typically structured as partnerships or corporations, with two or more partners focusing on real estate. They are not subject to the same rules and regulations as real estate investment trusts (REITs) and have more flexibility in their investment strategies.

REIGs offer several benefits, including pooled capital for investment, diversification, and the ability to invest in larger real estate projects. They are particularly attractive to high-net-worth investors who want exposure to real estate without the hassle of managing properties themselves.

However, there are also some drawbacks to consider. REIGs often have set fees that can eat into profits, and investors may not have immediate access to their money due to formal agreements. Additionally, the success of the group depends on the skills and experience of the decision-makers, so there is a risk of failure if the group is unskilled or inexperienced.

When evaluating a REIG, it is important to consider the track record of successful real estate investments, transparency in business operations and financial performance, and the expertise of the management team. Regulatory compliance is also crucial to ensure the group follows relevant regulations.

Overall, REIGs provide an opportunity for investors to speculate in real estate with reduced commitment and funding requirements compared to individual investments.

Flipping Properties

Set a Budget

Flipping houses requires significant capital, so it is important to ensure you have the necessary finances before starting. The national average cost for flipping a house in the United States is $47,903, but costs can vary widely depending on the extent of the renovations and other factors. It is crucial to accurately estimate the costs involved to turn a profit. In addition to the purchase price of the property, factors such as taxes, insurance, title fees, financing fees, and renovation costs should be considered.

Find and Acquire the Property

Look for properties that fit your budget and renovation plans. Foreclosures, auctions, and short sales can be good places to find deals. It is recommended to follow the "70% rule," which states that the purchase price should not exceed 70% of the property's after-repair value (ARV) to ensure profitability. For example, if the ARV of a property is estimated to be $320,000 and the renovation cost is expected to be $40,000, the maximum purchase price should be $184,000.

Timeline and Contractors

Once you have acquired the property, set a timeline for the renovations. Depending on the extent of the work, this could take anywhere from a few weeks to several months. Hire reputable contractors and ensure their quotes are in line with your budget and timeline. Prioritize any structural or foundational issues, such as plumbing or electrical problems, before moving on to cosmetic updates.

Staging and Selling

When the renovations are complete, it's time to stage and market the property effectively. Use social media to reach a wider audience, take appealing photos with good lighting, offer virtual tours, and be transparent about any remaining issues. According to the National Association of Realtors, 77% of buyers felt they were better able to envision themselves moving into a staged home.

Potential Profit and Risks

Flipping houses can be lucrative, with an average return on investment (ROI) of 26.9% in 2022. However, it is important to note that house flipping also carries risks and potential losses. There may be unexpected issues or delays, and the real estate market can be volatile, impacting your ability to sell the property at the desired price. Therefore, it is crucial to have a solid understanding of the market, set a realistic budget, and be prepared for potential challenges.

Real Estate Investment Trusts (REITs)

REITs are required by law to pay out at least 90% of their taxable income to shareholders as dividends each year, and most pay out 100%. They are an excellent way to diversify a portfolio, as they have a low correlation with other assets, and they can help reduce overall portfolio risk and increase returns.

There are several different types of REITs, including apartment, factory outlet, health care, hotel, industrial, mortgage, office, and shopping centre REITs.

When investing in REITs, it is important to consider the risks, such as liquidity, share value transparency, and potential conflicts of interest. Non-traded REITs, for example, are illiquid investments that cannot be easily sold on the open market.

REITs can be purchased through a broker or financial advisor, or by investing in a REIT mutual fund or exchange-traded fund (ETF).

Online Real Estate Platforms

Online real estate investment platforms and apps have emerged as a convenient and accessible way to invest in real estate, offering an array of benefits to potential investors. These platforms provide an opportunity to diversify investment portfolios without the need to physically visit properties. They also enable individuals to generate passive income from rental properties or earn dividends from real estate investment trusts (REITs).

RealtyMogul

RealtyMogul is a leading real estate crowdfunding platform that aims to democratise real estate investing. It offers pre-vetted public, non-traded REITs, as well as investments in commercial real estate properties. The platform is accessible to both accredited and non-accredited investors, providing investment opportunities with minimums ranging from $5,000 to $50,000.

Fundrise

Fundrise is an app-based platform with a low minimum investment requirement of just $10, making it ideal for non-accredited investors. It offers electronic real estate funds, venture capital funds, and IPOs. Fundrise's investments have a minimum term of five years, and its portfolios feature auto-investing, dividend reinvesting, and referral discounts.

Yieldstreet

Yieldstreet caters to accredited investors, offering a range of alternative investments, including real estate, legal finance, marine finance, crypto, and art finance. However, non-accredited investors can still access the Yieldstreet Prism fund, which allows investment in multiple alternative asset types. The platform offers more flexible investment terms, ranging from six months to five years.

Groundfloor

Groundfloor is a wealth tech platform specialising in short-term real estate debt investments, such as SEC-qualified Limited Recourse Obligations (LROs) and notes. It is open to both accredited and non-accredited investors, with investment terms ranging from 30 days to 36 months. Groundfloor also offers various IRA options and a mobile investing platform called Stairs.

EquityMultiple

EquityMultiple is a platform exclusively for accredited investors with a minimum investment requirement of $5,000. It provides access to a diverse range of commercial real estate assets, including multifamily, office, industrial, retail, and more. The platform offers various investment approaches, such as fund investing, direct investing, and savings alternative investing, each with different strategies and minimum requirements.

CrowdStreet

CrowdStreet is an online real estate marketplace designed for accredited investors to find pre-vetted, institutional-level commercial real estate investment opportunities. It offers both debt and equity opportunities, generating passive income streams. CrowdStreet provides in-depth information on underlying properties, investment strategies, target markets, and investor return structures.

DiversyFund

DiversyFund is a real estate crowdfunding platform that focuses on undervalued multifamily properties with high growth potential. It has a low minimum investment requirement of $500 and is open to both accredited and non-accredited investors. DiversyFund's Auto Invest feature enables users to set recurring trades in the Multifamily Fund for a long-term, hands-off investment approach.

Arrived

Arrived is a newer platform offering residential and vacation rental property shares to accredited and non-accredited investors. It provides dividend payouts, property appreciation, and flexible liquidity options. Investors can hand-pick individual properties or invest in pre-built funds for instant diversification.

When choosing an online real estate investing platform, it is essential to consider your investment goals, risk tolerance, time horizon, and the amount you are willing to invest. These platforms vary in terms of fees, investment types, liquidity options, and accessibility for different types of investors.

Frequently asked questions