As is the case with any investment class, real estate is incredibly varied. Not only are there multiple asset classes to consider (office, multifamily, industrial, multifamily, etc), but there are also many viable investment strategies. Would-be real estate investors can choose between real estate syndications, direct investments, crowdfunding, REITs, and many more options.
The strategy that you choose largely depends on your personal investment strategy and the amount of funds that you have readily available. However, understanding the difference of these various investment strategies is important. Educating yourself about the strategies that have been proven effective can ensure that you are following an informed strategy that is best suited to make your investing goals a reality.
A primary difference in real estate investment strategy boils down to where you sit in the capital stack. Said another way, it comes down to debt investing versus equity investing.
What is Debt Investing?
When you decide to invest in real estate debt, you’re assuming the role of lender. In essence, you are either buying out the current lender’s position or you’re originating your own loan. Typically, a debt investment is more secure than owning equity, as the subject property serves as the debt security while your basis remains at a discount to value. If your borrower fails to repay the debt, you can foreclose on the property and seize ownership. If they do repay the debt, you not only recoup the initial investment, but you also collect interest, which serves as the profit.
Some investors prefer debt investments primarily because of the security and the fixed return they provide. When you purchase existing real estate debt, you can look to the interest rate to forecast the amount of money that you can expect to earn.
However, even though debt investments are often considered a safer option, it’s worth noting that there are downsides. The primary drawback is that your upside is capped. Generally speaking, you will not earn more profit than the amount of interest you receive.
What is Equity Investing?
Equity investments in any asset class is risky, but they also provide the highest rate of return. As is typically the case in investing, the higher the risk, the higher the reward. Equity investing in real estate can take several forms. For instance, if you purchase an apartment complex outright, you own 100% of the equity in the complex, and thus, you are entitled to 100% of the profits. However, not every investor has access to the funds that are needed to purchase 100% ownership in an apartment complex. Additionally, savvy investors understand the importance of not tying up all of their funds in a single property.
That’s why it’s a good idea to find a way to invest a portion of your assets in a piece of real estate without being responsible for all of the costs associated with the initial purchase and the other costs that come with property ownership. Some investment opportunities allow investors to purchase a share of a property in the same way that they would purchase shares of a company on the New York Stock Exchange.
One such example is found in real estate investment trusts (REITs). REITs allow investors to purchase shares of a real estate investment company that typically owns a diversified portfolio of real estate.
One of the most important aspects of equity-based investing is choosing a REIT with a proven track record of generating profits. At Streitwise, we use all of our resources to ensure that investors are receiving an optimal return on their equity-based investments. Our team of industry professionals not only understand investing, but we also understand real estate. And we put our money where our mouths are, investing over $5 million of our own money into the strategy. Our commitment to consistently strong risk-adjusted returns ensures that our investors are well-positioned for the long term.
Adam Luehrs is a writer during the day and a voracious reader at night. He focuses mostly on finance writing and has a passion for real estate, credit card deals, and investing.