The real estate is coveted, highly attractive — and uncomfortably unfamiliar to many investors.
While it is widely accepted that a strong investment in real estate has the potential to generate significant wealth, relatively few investors have had the opportunity to gain first-hand experience with the asset class until recently. And despite its many benefits, immovable property can be a complex investment. With today’s wide availability of opportunities, knowing how to approach all types of real estate investment methods — both active and passive, from rental properties to public REITs, to Fundrise, is as important as ever.
Shrewd investing begins with the knowledge to ask the right questions. This is where this article could be of help. Whichever method you plan to use to spend your first dollar on real estate, these are questions that you should consider in advance. By studying the points and potential pitfalls outlined here, before committing your hard-earned cash, you can learn some of the crucial ways to assess an investment.
Questions to consider before making any investment in real estate
Let’s start with questions every prospective investor in real estate should think about, regardless of what type of investment model they are considering.
Do you have the time and experience to actively invest or will you make more sense investing passively?
There are significant differences between active and passive investment in real estate, and most investors will have a clear tendency over each other. If you’ve just started thinking about real estate in general, though, you might not have figured out exactly where your preference lies. When you do that, you’ll probably recognise which solution best fits your situation — or you can understand that one model is simply not feasible or economical for you. Love the thought of being a landlord, for example? Look at options which are active. Alternatively, just don’t you have the time to deal firsthand with properties and tenants? Find investments which are passive. Such decisions can have an immediate impact on the particular investment you are pursuing, and how much it costs you to get started.
What is your timeline for the investment? And, how important will you be to liquidity in the future?
Although some styles are especially illiquid (which is not necessarily a bad thing!), establishing a timetable, or investment horizon, is critical for any investment. That makes it even more important to identify a comfortable timeline when it comes to real estate investment. Make sure that you know when and if you will need liquidity, and if so, whether the investment can support your specific needs.
Which are the possible tax benefits?
Tax benefits can be offered by both active and passive real estate investments but the exact tax benefits available to investors depend on the investment.
On the passive investment side , for example, income earned from pass-through structures such as REITs can qualify for a 20 per cent tax deduction thanks to the Tax Cuts and Jobs Act.
The Tax Cuts and Jobs Act also created the Opportunity Zone Program which enables both active and passive real estate investors to invest through Qualified Opportunity Funds in opportunities areas. Opportunity Funds provide investors with many capital gains tax incentives, including a way to defer and reduce taxes on capital gains for funds invested in Opportunity Funds – and provide a way to eliminate taxes on any capital gains earned from Opportunity Fund investments.
On the active investment side, a 1031 Exchange offers investors a way to indefinitely defer taxes on the capital gains on their initial investment. While a 1031 Exchange does not allow an investor to reduce their tax liability for capital gains, it can offer an inheritance-based step-up. This feature has made it a useful tool for some active real estate investors to plan for their properties.
Every collection of tax benefits will help an investor achieve a different goal. That is why it is important to decide which tax benefits can better help you achieve your investment goals.
How does immovable property impact your portfolio?
One of the most renowned advantages of real estate is its capacity to diversify a portfolio. But the diversification isn’t all equal. Make sure you understand exactly how adding a new investment can affect your investment situation overall risk and earning potential. Whether an investment is in the public or private sector , for instance, may play a huge part in diversifying its strength.
What attracts you to a particular investment in real estate? How can you describe achievement?
“Money, mony! “May seem like an easy answer, but the responses can be as diverse as the people themselves. For some, their first choice of real estate scenario is an adrenaline-pumping fix-and-flip, while others want to stay as far away from hands-on work as possible. Knowing what matters most to you in an investment can help you develop a clear picture of how this investment will be a success. Most likely it will include a target of return, but will include some other elements, advantages. Or accountabilities?
Before you invest in real estate, do it yourself: active investments
Think you might be interested in taking out a mortgage and buying a rental condo across the city in that bustling new neighborhood? Have you ever seen a coworker fund their summer holidays with a dedicated AirBnB-and now you want to set up your own? That is to say, are you ready to become a landlord?
These are the questions to consider on your own, prior to initiating an active real estate investment, where you are personally responsible for the decisions that will impact the investment’s success.
How much down payment and hypothesis do you need to start? How much further capital will you need in the future?
This is the first consideration for an active real estate investor, and probably the most obvious. A traditional, active investment in real estate involves buying a property directly — land , building, and everything — either for rent or resale. That is an expensive prospect for a lot of investors. Moreover, investing in real estate is rarely a static sector, consisting of simple buy-and – sell transactions. You often need to do some value-added work in the form of retrofits or repairs. And those extra tasks cost more money than your initial investment. In addition to these, you must consider ongoing costs such as property taxes, home insurance and mortgage insurance. Don’t forget to consider soft costs along with hard costs when analyzing the price of an investment.
Should you choose a debt or equity investment according to your risk tolerance, liquidity needs and desired return?
This question illustrates how it may occasionally take much more specialized knowledge to enter an investment on your own. On the one hand, deciding between debt and equity implies a substantially advanced level of investment that many people will never directly encounter. But on the other hand, if you consider the full spectrum of real estate, you are likely to face these distinctions, and knowing the pros and cons of each of these systems can be vital to optimizing potential efficiency and mitigating risks. Making the right choice requires you to control each other comfortably and how they work together, such as how the “cap stack” works. Investing directly in real estate can give clear upsides — every profit received is yours and yours alone — but it also ensures that you have every obligation to consider complexities.
In your given market, which asset type and strategy are right for you?
Residential-houses or condos-are the most obvious real estate assets for direct investment. But are there any other variables which could make another type of asset a more promising option? Office or Retail space? Thanks to a change in local laws, there may have been a new influx of young professionals and office buildings are increasing in value. But, with a change in class of real estate, a change in expertise is needed as well. Assess the options and make sure that under all apparent situations, your money does the best it can.
How well do you understand the particular town you are planning to invest in? What are the risks and local opportunities?
“Location, location, location” is as accurate a saying as it is a cliché. A Brooklyn warehouse could have an entirely different outlook from an identical Akron structure. How can you expect to develop the area that you are eyeing? You need to make sure that you account for as many location-specific variables as possible, from natural disaster hazards to noise pollution, all of which can make it difficult to secure tenants. Perhaps the building next door is a school for example. That can have a major effect on the way the property can be developed and used. Be honest with your expertise’s fidelity—try to know what you don’t know, and fill the gaps.
How much time do you have to devote to your investment in real estate?
Time is, for some investors, a commodity scarcer than dollars. Similarly, some investment models inherently apply considerably more time strain than others. If you need a landlord to invest, can you spare the hours? Can you afford to hire a real estate manager if not? Unlike other investments, which require attention only to hours of trading, a property requires constant management as long as you own the investment.
Until you invest in real estate: through a company, program and/or website
Direct buying of real estate could be the most widely known way of investing in the asset class, but it’s far from the only method. Today, there are a wealth of options for market access, for all sorts of investors. The acquisition and management of immovable property is left to dedicated and experienced professionals with “hands-off,” passive investment methods. Public REITs and online platforms can significantly streamline the process of investing. These models, however, also come with their own list of crucial questions, which is equally important to review if you decide this is the right approach for you.
Are you qualified?
Again we suggest starting off with one of the most important yet significant topics. Before spending too much time imagining your future with a specific service, make sure that you check and confirm what kinds of investors it admits. For example, some funds provided by renowned private equity real estate companies, such as Blackstone, have a history of admitting only investors that meet certain salary thresholds, while newer platforms, such as Fundrise, allow anyone to invest.
This is the average record of an investment manager?
You should also note that past success does not and can not guarantee future outcomes — so one way to gain an understanding of the competence and character of the company is to look at the track record of a business. How does the manager you are considering fared in previous years have it? Did they in the past demonstrate responsible custody over the funds of investors? Growing of these variables will help you decide what the investment experience with a specific service will be like.
If the economy experiences a decline, how does the company behave?
Does a consultant give an indication of how they will act if the market changes its behavior from the way it looks right now? Successful, experienced investors will invoke the fact that the market is inherently volatile – which is completely true – but the value of planning is not diminished. Make sure you know that your counselor has a strategy for the next financial crisis, no matter how likely it is today , tomorrow or in five years to come around the corner.
Do the fees and expenses make sense?
The investment in immovable property has a variety of built-in costs, whether achieved actively or passively. These are a simple, inescapable by-product of the asset type itself: for example a property requires a certain amount of ongoing costs to generate dividends. The bottom line is to make sure that you understand the fee structure of a service and confirm it makes sense, given the value the investment manager creates for you to use your capital.
How well can the Service track and manage the investment?
One of the great advantages of investing directly in real estate is that you’ll never doubt what your money is up to or how to track it. On the other hand, if you invest using a service, you can only track things the service gives you visibility into. What does that look like? Is the information understandable and easy to access? Now that most resources are online, interactive reporting and ease of management are planned. Be sure you understand how you can communicate with your investment after the investment manager hands over your money.
Would a public-market or private-market fund fit your investments better?
One of the key reasons people turn to real estate is to increase the overall diversification of their portfolios. Something like public REITs will often seem satisfactory as they can expose you to up to one hundred distinct properties, apparently offering wide diversification. However, in reality, public trading of these funds can seriously compromise how well they diversify beyond other public market assets, such as the stock market — a publicly traded fund will often closely correlate with other public investment in your portfolio. On the other hand, platforms that invest in private real estate can provide access to thousands of private-market assets, which can reflect considerably deeper diversification in total.
If you want to invest what’s next?
No one but you can answer these questions in many cases, based on your financial circumstances, your personal preferences, your experience and the particular opportunities you have access to. But don’t let an abundance of options intimidate you into choosing nothing at all — there’s a great chance that your investment portfolio can benefit in many ways.
Depending on how you want to invest in real estate, and the investment model you think is best for you, you may find that Fundrise offers a genuinely innovative opportunity: open to all, investments of virtually any scale, completely passive, and with minimal fees.
We built Fundrise to make private-market real estate investment quicker and easier than ever before.