Real estate is one of the largest asset classes globally. A big component of the world’s wealth is in different real estate related assets. Most people assume that real estate exposure is obtained through buying a house. However, there are many ways to invest in real estate and residential real estate is just one of them. Different ways in which one can take investment exposure to real estate are mentioned below.
1) Buying a residential property
Buying a property is a direct exposure to a real estate asset class. This is the most common way globally in which investors take exposure to real estate in their portfolio. Residential real estate refers to condominiums, apartments, villas, bungalows, residential land, and other such properties.
2) Buying real estate in categories other than residential
Real estate investing does not only mean buying a house. It could also mean the following categories.
Commercial – this refers to shops or offices in malls or standalone locations.
Warehousing and industrial– real estate locations that are located in logistics and distribution hubs and that can be used for warehousing purposes.
Agricultural – this entails investing in land that can be used for farming purposes. The farming can be done by the owner of the land or can be leased out to a farmer in return for rent. Sometimes, due to urban development activities, agricultural land gets reclassified as commercial or residential properties and results in significant appreciation of value.
Given the economic nature of the activities underlying the above assets, they have the potential to offer higher returns as compared to residential real estate along with long term contracts. However, the risk associated with them can be higher too.
3 Buying shares in a REIT
Real Estate Investment Trusts, abbreviated as REITs, are listed entities. These entities contain the ownership of some residential or commercial properties depending on the type of REIT. Buying a share in a REIT is like buying shares in a company that owns all the properties. Compared to buying a house, the advantage of a REIT is it provides diversified exposure to a group of properties. Since a REIT is listed, another advantage is that exiting a REIT is easy as one can sell shares any time in the public market.
4) Investing in crowdfunding real estate platforms
Crowdfunding real estate platforms are a relatively new phenomenon globally. In these platforms, a particular property is identified and then the platform markets that property to its online users for investment. Once the platform’s users commit to investing the required amount for purchasing that property, the transaction is then closed. investors can invest a certain amount and get proportionate ownership in the property. The platform also manages the property over the period of the investment. Fees charged include a one-time entry fee, annual administration fee and a one time exit fee. Given the recent launch of these platforms, the experience of investors with these platforms is still not very tested.
5) Buying stocks of Real Estate developers or real estate service companies
Real estate developers build houses and then sell them for a profit. When buying homes makes economic sense for the population then the business of real estate developers does well. Directly taking ownership in shares of real estate developers will provide
6) Buying real estate focused mutual funds or ETFs
There are mutual funds and Exchange Traded Funds that focus on the real estate sector. Investing in these securities gives investors exposure to a pool of diversified real estate related assets.
7) Investing into a Real Estate private equity fund
This route is available only to High Net Worth individuals. In this route capital is provided by HNIs to an investment manager who focusses on investing in real estate. An investor initially signs a commitment to provide capital up to a total cumulative amount to the fund manager. The fund manager will identify investment opportunities and will ‘call’ capital from the investor. The investment manager will then manage the portfolio of real estate investments. Upon exit, the investment manager will provide the capital back to the investor after deducting any fees and profit-sharing incentives.
Depending on one’s risk appetite, liquidity requirements, return objectives, one can choose one of the above ways to invest in Real Estate.
Disclaimer: Vitspan does not provide any investment related, tax related or financial advice. The information presented is done so without considering the investment objectives, risk profile, or economic circumstances of any reader or investor. The information presented may not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the potential loss of principal. Please consult your financial advisor prior to making investment related decisions.