There are many ways to invest in real estate, both publicly and privately. Whether you’re deciding to invest in commercial assets and funds, residential rental or vacation properties, raw land or trusts; you will first need to determine how involved in the investment process you want to be.
What does your life schedule look like?
Do you have the availability to become an active real estate shareholder? Depending on the asset class or fund you choose to manage, you’re going to need a vast amount of expertise and a mastery of skills in finance, tax, construction, design, operations, employee management and many other facets that come with being an active investor in this industry. Or, you’ll need the capital to export those responsibilities to third-party companies to manage them for you.
If this sounds too ambitious or complex to do, but you’re looking to diversify your portfolio with an alternative asset class, which can potentially bring in higher yield returns than traditional investments like stocks, bonds or ETFs; you may be a perfect candidate to participate in passive real estate investing instead.
Do you know what your real estate investment risk profile is?
Essentially, passive real estate investing is the opposite of active investing. It’s hands-off, as you let the investment professionals handle the end-to-end process for you until the investment is divested.
Every alternative fund asset management sponsor is different. You may encounter fund/asset managers who only manage the money-end of the deal, and then outsource the rest of the responsibilities to third-party companies to manage a pipeline of different activities including acquisitions, construction and development, operations, property management, branding and marketing, sales, taxes, refinancing, etc.
Alternatively, there are fund/asset sponsors who offer full-spectrum, end-to-end real estate investing services articulated above. Remember, ensure to do your own research before committing capital with any public, or private investment firm. It’s important to ensure you know:
- The track record and investment history of who you might work with
- Review the investment strategy to know what the timelines are, potential risk profiles, returns, etc. is spelled out clearly
- The fund sponsor employs transparent and open communications regarding the status of your investment(s)
A real estate investment trust (REIT) is a type of company that owns, operates or finances income-producing commercial real estate properties that are accessible and traded on the public stock market exchange. Comparatively, a private equity real estate (PERE) alternative fund sponsor pools investor capital into real estate assets that typically are less accessible and operate differently than REITs.
The Advantages and Disadvantages of REITs
- Lower time holding commitments
- Easier to sell, more liquid
- Accessible to the general population
- The entry fee minimum is much lower
- Limited growth potential
- Higher Fees
- Owning paper stock vs owning a real property
- Typically, lower returns than PERE
- Speaking with C-Suite directly is almost impossible
The Advantages and Disadvantages of PERE
- Teams and processes are more agile and flexible to market changes
- Real property ownership
- Incentivized to raise money and perform
- Potentially more alluring tax benefits
- Potentially higher return on investment (ROI)
- Typically, easier access to speak with C-Suite
- Longer lock-up periods
- Potential Illiquidity issues
- Must be an accredited investor
- Potential higher down payment to participate
- Typically, a riskier investment
As per the Securities Act of 1933 and defined by the U.S. Securities and Exchange Commission (SEC) in Rule 501 of Regulation D, the investor suitability requirements stated below represent the minimum suitability requirements to qualify as an accredited investor:
- Any natural person that has individual net worth or joint net worth with his or her spouse or spousal equivalent, of more than $1 million. “Net worth” means the excess of total assets at fair market value—including personal and real property, but excluding the estimated fair market value of a person’s primary home—over total liabilities.
- Any natural person that has an individual income in excess of $200,000, or joint income with his or her spouse in excess of $300,000, in each of the two most recent years and has a reasonable expectation of reaching the same income level in the current year. The term spousal equivalent shall mean a cohabitant occupying a relationship generally equivalent to that of a spouse.
Caliber – the Wealth Development Company – is a middle-market alternative asset manager and fund sponsor with approximately $1.5 billion in assets under management and development. The Company sponsors private funds, private syndications, as well as externally managed real estate investment trusts (REITs). It conducts substantially all business through CaliberCos, Inc., a vertically integrated asset manager delivering services which include capital formation and management, real estate development, construction management, acquisitions and sales. Caliber delivers a full suite of alternative investments to a $4 trillion market that includes high net worth, accredited and qualified investors, as well as family offices and smaller institutions. This strategy allows the Company to opportunistically compete in an evolving middle-market arena for alternative investments. Additional information can be found at CaliberCo.com and CaliberFunds.co.
Click here to see Caliber’s current property portfolio.
If you would like to speak to someone about diversifying your retirement accounts, contact us at [email protected] or call (480) 295-7600 to schedule a call with a member of our Wealth Development Team.
If you would like to learn more about Opportunity Zone Investing, Caliber has put together a special guide that cuts through the myths and misconceptions and outlines the benefits, the risks, and the upcoming deadlines you must know to be able to participate. Get access to the guide here.
The information contained herein is general in nature and is not intended, and should not be construed, as accounting, financial, investment, legal, or tax advice, or opinion, in each instance provided by Caliber or any of its affiliates, agents, or representatives. The reader is cautioned that this material may not be applicable to, or suitable for, the reader’s specific circumstances, desires, needs, and requires consideration of all applicable facts and circumstances. The reader understands and acknowledges that, prior to taking any action relating to this material, the reader (i) has been encouraged to rely upon the advice of the reader’s accounting, financial, investment, legal, and tax advisers with respect to the accounting, financial, investment, legal, tax, and other considerations relating to this material, (ii) is not relying upon Caliber or any of its affiliates, agents, employees, managers, members, or representatives for accounting, financial, investment, legal, tax, or business advice, and (iii) has sought independent accounting, financial, investment, legal, tax, and business advice relating to this material. Caliber, and each of its affiliates, agents, employees, managers, members, and representatives assumes no obligation to inform the reader of any change in the law or other factors that could affect the information contained herein.
 Journal of Real Estate Research, February 1999