Real estate crowdfunding

Average annual returns in long-term real estate investing vary by the area of concentration in the sector. Average 20-year returns in the commercial real estate slightly outperform the S&P 500 Index, running at around 9.5%. Residential and diversified real estate investments do a bit better, averaging 10.6%. Real estate investment trusts (REITS) perform best, with an average annual return of 11.8%.

The S&P 500 Index’s average annual return over the past 20 years is approximately 8.6%. By any measurement, the real estate sector has outperformed the overall market, even factoring in the drastic collapse in housing prices during the 2008 financial crisis.

The real estate sector is divided into two main categories: residential and commercial real estate. Within either category, there are vast and varied opportunities for investors, such as raw land, individual homes, apartment buildings, and large commercial office buildings or shopping complexes. Investors can choose to invest directly in residential or commercial real estate or invest in real estate company stocks or bonds. There are also mutual funds and exchange-traded funds (ETFs) available that track the real estate sector.

One way investors can easily obtain diversification in real estate investments is through investing in one of the best-performing real estate investment instruments, REITS. REITS are securities that trade on an exchanges, just like regular stocks. REITs may be invested in properties, real estate or property management companies, mortgages, or any combination of these. They are specially regulated and offer tax benefits and investment advantages, such as dividend reinvestment plans. REITs have established a reputation for offering investors liquidity, diversification and good overall investment returns.

Investors can invest directly by buying shares of REITs or obtain access to them through real estate sector mutual funds or ETFs that have major portfolio holdings of REITs.

Real estate can be a good addition to a traditional stock and bond portfolio because it offers diversification. Real estate is its own asset class and can offer generous yields during periods of depressed economic activity and appreciation when economic activity is strong.

Thus, in some ways, it combines characteristics of stocks and bonds that tend to move in opposite directions unless there are unusual economic conditions. Most financial advisers consider real estate an alternative investment on the level of commodities. Both are less correlated to bonds and stocks, and can help a well-diversified portfolio smooth out rough patches.

Real estate tends to be de-emphasized because most people already have significant exposure to the asset class via their homes. The home is most people’s largest asset, so finding exposure to real estate is typically not a priority. The real estate bubble, following the technology bubble, has reduced the luster of real estate as an investment option. Nevertheless, over the long term, as long as household formation continues, real estate continues to be a viable asset class.

Additionally, some stock portfolios have allocation to mortgage insurers or real estate investment trusts, or REITs, which tend to pay healthy dividends. Both of these sectors are tied to the real estate industry and thrive when real estate prices are rising. Over the long term, real estate market health is determined by demographic trends and economic growth. These trends continue to remain favorable, making it an attractive option for investors seeking noncorrelated returns.

The term equity refers to one’s ownership. In real estate, equity is the value of the owned real property, less anything that is owed on the property. For example, a homeowner may have a house valued at $300,000 but have an outstanding mortgage loan balance of $225,000. The homeowner, therefore, has $75,000 in equity. There are several ways investors can profit from real estate equity. First, there are two sides of the market: public equity and private equity. Deciding which way to invest depends on the investor’s available capital, time horizon and risk tolerance.

Investors can also gain exposure to real estate equity through equity real estate investment trusts (REITs) that invest in a collection of properties. With REITs, an investor does not have to actually own a property that must be maintained. These portfolios of commercial properties, such as malls and office buildings, pay high dividends to shareholders, which are generated by rental income from the properties. REITs are much more liquid investments than owning real property in the traditional sense because they trade like a stock.

Derivatives of real estate investments called swaps can also be used to profit from equity in real estate. With these investments, two parties simply swap interests in properties they own for a contracted period of time and at a contracted premium rate. They allow real estate investors to tactically change exposure in different sectors of the market for short periods of time. These investments carry more risk, as they are very illiquid.

The act of manipulating, building on, and/or designing and constructing new uses for real estate is known as developing. Those that engage in real estate development are called “developers.” Developers purchase land and either create or renovate the property, risking their resources and capital in the hopes of investment reward.

Sometimes real estate development is undertaken as a public works project, in which case it is not viewed as an investment in the classic sense. The government engages in public works development in order to benefit certain communities, put idle laborers back to work, or sometimes to just maintain a certain budget size.

For private developers, real estate development is a long-term, entrepreneurial undertaking. The developer must believe that the newly designed and designated real estate will have sufficient value (and meet sufficient demand) to compensate for the time, labor and other resources devoted to the project.

In urban areas, development is often restricted by community zoning laws. This is because most city and county government planners engage in Planned Urban Development (PUD), which segregates the uses of real estate (commercial, residential, recreational, etc.) into different “zones.” In order to change the use of a property, developers must usually receive permission from city planners.

In the most general sense, real estate development is simply the mixing of one’s labor with the land in order to achieve a predetermined end. In complex modern society, however, real estate development requires knowledge of financing, legal restraints, business and market forecasting, and project supervision.

While the risk of investing in the real estate sector varies by segment, this sector generally carries greater risk than the broader market. The real estate sector’s volatility makes it popular among growth investors who shoulder greater risks in exchange for higher return potential. Many investors with exposure to the real estate sector mitigate the associated risk by investing in noncyclical or counter-cyclical sectors, both of which perform better than average during down markets when real estate and other highly cyclical sectors perform the worst.

The Real Estate Sector
Three segments compose the real estate sector. The largest, real estate operations and services, deals with the operations side of real estate, including financing, insurance and maintenance. This segment carries a beta of 1.3, which indicates it is 30% more volatile than the broader market.

The second real estate segment is development. Large contracting companies and other firms involved in real estate development make up this segment, which, with a beta of 1.02, is the least volatile of the three. The segment tracks closely with the broader market, exhibiting only 2% greater volatility.

General and diversified real estate, a segment composed of real estate companies that do not fit into the above categories, is the smallest segment in the sector. It is also the most volatile, carrying a beta of 1.82. This tiny segment is attractive to growth investors as it beats the market by 82% when times are good.

REITs
Conservative investors, those who eschew risk, look to real estate investment trusts, or REITs. A REIT offers much more stability than traditional real estate. It has its own sector, which carries a beta of 0.79, making it 21% less volatile than the broader market.

A hedge fund is a type of investment vehicle and business structure that aggregates capital from multiple investors and invests that capital in securities and other investments. Hedge funds are different from mutual funds in that they are willing to take on more risk and their leverage is not capped by regulators. Hedge funds normally invest in liquid assets. However, they can invest in different types of investment products, and hedge fund managers have been adding real estate to their lists of nontraditional investments. Of all the hedge funds in operation, roughly 40 of them heavily invest in real estate, giving them the name of “real estate hedge funds.”

How a Real Estate Hedge Fund Works
Real estate hedge funds invest heavily in real estate, but the way in which they invest capital varies by managerial strategy. For the most part, however, real estate hedge funds invest in the publicly traded stock of existing real estate companies, mainly real estate investment trusts (REITs).

A REIT is a corporate entity that invests exclusively in real estate and is given a tax exemption for doing so; REITs are required to disburse at least 90% of their income, although that income may be subject to tax for the REIT’s investors. The structure of a REIT is designed to duplicate the type of investment vehicle that mutual funds provide for securities but in the form of a real estate investment vehicle.

A second way a real estate hedge fund invests its money is through the acquisition of underperforming properties at low rates. These properties can be purchased in one specific region or around the globe, but the reason for the sale is normally due to a lack of liquidity on the part of the seller. This differs from a REIT investment strategy since the real estate hedge fund owns the asset as the investment.