Private Real Estate Investing: How to Tell Whether It’s Right for You

From television talk show hosts to your neighbor next door, you’ve probably heard this many times before – “To diversify your investment portfolio, you first need to pick the right investment options.” Depending on your exact goals, you can consider REITs, DSTs, or real estate ETFs among others. Buying real estate can be challenging for those who would rather not deal with day-to-day management. 

However, private real estate investments are run by experts with years of experience in the industry. As an investor, all you need to do is contribute your share of the capital, sit back and relax. The returns (from REITs in particular) are quite competitive compared to stocks, for example.

However, as with all investments, there are certain pros and cons that investors need to be aware of:

The Pros

Private real estate investments come with substantial tax benefits. Here are some of the chief advantages of private real estate investments:

Expert Management:

Depending on their strategy, private real estate funds like REITs or DSTs invest in various markets. This provides diversification and risk reduction. Fund managers follow a nuanced strategy which means better returns than would have otherwise been possible for investors.

Risk Reduction:

Private real estate gives investors an alternative to the fluctuations in the stock market. It allows you to share the risks proportionately with other investors. Not only that, private real estate funds typically invest across markets and asset classes, increasing the probability of better returns.

Better ROI:

Real estate is more stable than the stock markets making it a safer investment option. It can bring balance to your portfolio when stocks fall and enable you to earn better returns on average.

The Cons

As with any investment, there are certain risks involved with private real estate:

Poor liquidity

Real estate investments provide the best returns only over the long term. They can run for 5 to 10 years on average. While some are relatively easy to sell, others are not. For example, privately traded REITs do not have a secondary market which can create liquidity problems.

Administration/management fees

Private real estate investments usually cost more in terms of management and administration fees. In some cases, the fees may even offset the returns you make. So, it is important that you carry out a cost-benefit analysis before investing.

Investment Minimums

Private real estate investments have higher minimums compared to publicly traded investments. The difference is substantial, making private real estate inaccessible for the average investor.

Compliance with Regulatory Requirements

According to the IRS, only accredited investors can invest in private real estate. This means that you must have 

(1) an income of a minimum $200,000 for two consecutive years (and expect to earn a similar amount in the current year) or 

(2) have at least $1m in assets, not including your primary residence. 

This requirement can preclude many investors from investing in private real estate.

Last Words

Adding real estate to your portfolio can help you hedge against inflation and get better ROI. However, the decision to invest should be based on your risk profile and financial goals. True North helps investors allocate their money efficiently for the best possible risk-adjusted returns. For more information, contact our team today!

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