Investing in rental real estate stretches far beyond the common thought of simply purchasing an investment apartment building or renting out your old single family house. While that method still works great, not everyone wants to nor can afford to invest the large amounts of time and capital needed to successfully undertake a rental property project. Over the years, creative ways to invest in rental real estate beyond simply purchasing physical properties have gained popularity. Nowadays, there are many types of real estate investments that provide exposure to the lucrative profit potential of real estate as an asset class, without the physical labor and large sums of capital often associated with it.
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Buy and Hold
One of the most tried-and-true forms of real estate investing is simply called “buy-and-hold.” Buy and hold refers to a long-term real estate investment strategy where an investor purchases a property, rents it out, and continues to hold it for an extended period of time (usually 3-5 years). Benefits of this strategy include administrative simplicity, monthly recurring rental income, property value appreciation, and an overall ROI of initial investment. While buy and hold has many benefits, disadvantages include limited liquidity, property management, and long term commitment. Property management responsibilities can be optional whether or not an investor wishes to self manage or hire a third party management company. Overall, buy and hold is a great investment strategy for real estate investors that desire tangible, hands-on control of their investment.
There’s an old saying “A rising tide lifts all boats‘ that basically means a strong economy benefits all participants. This is exceptionally true in the realm of real estate stocks. When the real estate market is doing well, the odds of investing and profiting from real estate related companies via stock offerings greatly increases. Below we take a look at 2 of the most common types ways to to invest in real estate related stocks:
Real Estate Investment Trust (REIT)
Real Estate Investment Trusts (commonly called a REIT) are companies that finance, own, and often operate, income-producing real estate across a range of property sectors. These investment vehicles allow investors to invest small amounts of capital in the form shares to gain ownership of larger real estate deals. Most REITs are publicly traded companies that can be bought and sold on major stock exchanges, however, they must meet a number of requirements to qualify as a REIT. REITs typically specialize in particular asset classes such as office, retail, industrial, medical facilities, data warehouses and more. Since REITs are required to pay out 90% of their taxable income to shareholders, REITs are great income vehicles thanks to their regular distributions payouts typically in the form of a monthly dividend.
Real Estate Company Stocks
Global real estate as a whole is a vast $320+ Billion dollar industry. If you are not keen on getting hands-on with rental properties (think Tenants, Toilets, Trash), investing in publicly traded real estate companies is a great option for investors looking to gain exposure to the real estate industry without the hassle. Since real estate is an extremely broad category, investors have countless options for companies to invest in. From the shopping mall owner and operator Simon Group (NYSE:SPG), to real estate software data and marketing companies such as Costar (NASDAQ: CSGP), there are plenty of options available for all types of investors.
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Deleware Statutory Trust
A Delaware Statutory Trust (commonly called a DST) is a passive form of real estate holdings that provides investors with benefits such as recurring monthly income, 1031 exchange eligibility, asset appreciation, and more. Simply put, DSTs are separate legal entities that are created under the laws of Delaware (but do not necessarily operate within the state of Delaware) to hold title to income producing commercial properties. DSTs can hold title to multiple properties at any given time, which can be any type of commercial property such as multifamily apartments, retail, office, industrial, etc. The trust legally owns the property, and DST investors hold “beneficial interests” in the trust. These interests entitle investors to their pro-rata share of the income and appreciation generated by the assets within the DST.
While the concept of “Virtual Real Estate” might ruffle some feathers for older generations of real estate professionals, the concept is undoubtedly gaining notoriety especially with Metaverse real estate sales recently bringing in over $500 Million. Metaverse real estate can be described as unique parcels of virtual land, within a virtual world. The promise of these virtual parcels is that they are programmable and actually usable for a myriad of innovative use cases. Much like the physical world, these parcels can be used for socializing, hosting events, and digital real estate investors can even develop, flip or lease them.
Real estate syndication is a fancy title for describing the process of using investor pooled capital to purchase and reposition real estate. While the structure of each syndicate can vary greatly, syndications usually follow a repeatable process: Origination, Operation, and Liquidation. In a syndication investment system, there are always two main parties: Sponsor(s) and Investor(s). The Sponsor, who can also be called the Syndicator, Asset Manager, General Partner (GP), or Operator, is the individual or company that acts as the overall manager for the deal. The most common challenges for a Sponsor is sourcing quality deals and investor capital. The Investor’s role in real estate syndication is to simply provide the capital that the Sponsor will use for the deal. An Investor’s capital buys them ownership in the property, in which they typically receive income distributions (monthly or quarterly) as well as a return on their initial capital investment upon selling it. The most common challenge for Investors is finding trustworthy Sponsors with proven track records.