Private Real Estate Investing

Investing in real estate for the purpose of income appeals to a wide range of investors. There are a number of ways to do this:

1. Purchase the shares of a publicly traded REIT ETF: This is the easiest way to get exposure to real estate as an asset class. For example, the SPDR REIT ETF (RWR) tracks an index of 92 large REITs. The current yield on RWR is just over 3%.

The advantages of a REIT ETF are your investment is totally liquid, it’s diversified (within real estate), and you gain pro-rata ownership of some of the largest properties in the U.S.

The disadvantage is that your principal is at risk. REITs are greatly affected by the overall economy and the level of interest rates. They had a great 2014, returning over 30% as interest rates unexpectedly fell. However, it’s unlikely this performance will be replicated in 2015 as interest rates are set to rise.

2. Invest in a real estate crowdfunding site

Real estate crowdfunding allows you to invest as little as $5,000 in the debt of an individual real estate project. For example, a house flipper may be looking to borrow $300,000 for a 6-month house flip. He signs up with a crowdfunding site and agrees to pay 10% annual interest for the financing. The crowdfunding site funds the loan with contributions from individual investors (in increment of $5,000 or more) and the operator gets his money. Ideally, he makes the monthly interest payments and completes the deal on time. Investors are paid on a monthly basis and get their principal back at the end.

In order to be an investor, nearly all crowdfunding sites require you to be an accredited investor. I recently signed up with fundrise.com as an unaccredited investor, and I’m not currently able to see any deals. Fundrise states that they’ve done deals in the past that were open to unaccredited investors, but the time and complexity of dealing with SEC requirements were prohibitive. It’s not clear if they will continue to show deals to unaccredited investors.

3. Invest in a private real estate partnership

In any real estate market, there are many private firms looking for capital to do acquisitions. This can be hard-money loans for short term projects, or long term equity financing with a multiyear horizon. The advantage of this approach is that it’s relatively passive once you have vetted the sponsor.

4. Take direct ownership by buying a property outright

Buying an investment property is extremely popular, but since it’s an active investment that requires a lot of work, it’s doesn’t fit with the theme of this website. There are numerous other resources for information. A good place to start is this guide from Investopedia.