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Analytics, 09 September 2022

Indirect Investing in Real Estate

Investors continually adjust their portfolios to match current market trends. A common investor movement has been into real estate. Real estate offers benefits during volatile times as is the current state, offering an investment that is finite, insured, and a hedge for inflation that you can add value to it and can produce income.

Investing directly into real estate by, for example, purchasing rental property or house flipping comes with massive downsides. Instances like tenants locking themselves out or trashing your house bring about the extensive risk of losses that requires experience and deep knowledge to maneuver.

Savvy investors see the benefit of diversifying into real estate, but they don’t want the headache that comes with it. That is why they are investing indirectly in real Estate. Indirect real estate involves investing in pooled vehicles that own and manage properties, such as REITs or real estate crowdfunding.

With the emergence of blockchain technology, a newer method of real estate tokenization has emerged as another unconventional investment vehicle with advantages for both issuers and investors. It works by converting the value of real estate into a token stored on a blockchain, enabling digital ownership and transfer.

In this article, we analyze the different ways of indirectly investing in real estate.

Real Estate Investment Groups (REIGs)

Investors who want to own rental properties without the hassles of managing the property invest through Real estate investment groups (REIGs). REIGs act like small-scale mutual funds that invest in rental properties. They buy or build rental property, allow investors to join them by buying units of the property, and take on all management activities.

A single investor can own one or multiple units of self-contained living space and is provided with a standard real estate investment group lease in the investor’s name. The company operating the investment group collectively manages all of the units, handling maintenance, advertising vacancies, and interviewing tenants. In exchange for conducting these management tasks, the company takes a percentage of the monthly rent.

The advantage of investing through REIGs is that it provides a more hands-off experience than owning rentals. The investment also provides regular income while the property appreciates in value. On the flip side, REIGs presents various disadvantage like possible vacancy risks whilst also being susceptible to unscrupulous managers. It is also important to not lower margins as fees are similar to those associated with mutual funds.

Real Estate Investment Trusts (REITs)

A real estate investment trust (REIT) offers a more hands-off experience than REIGs. REITs get rid of involvement in any traditional real estate transaction on the part of the investor. A REIT is created when a corporation (or trust) uses investors’ money to purchase and operate income properties.

REITs are bought and sold on major exchanges, like any other stock. They are therefore highly liquid because they are exchange-traded trusts. In other words, you won’t need a real estate agent and a title transfer to help you cash out your investment. Like regular dividend-paying stocks, REITs are a solid investment for stock market investors who desire regular income.

A company achieves and maintains its REIT status by paying out 90% of its taxable profits in the form of dividends, whereas a regular company would be taxed on its profits and then have to decide whether or not to distribute its after-tax profits as dividends.

The advantage REITs provide is that they are essentially dividend-paying stocks and therefore produce regular income. Core holdings among REITs also tend to be long-term, cash-producing leases. Their disadvantage compared to REIGs is that leverage associated with traditional rental real estate does not apply.

Real Estate tokenization

Real estate tokenization is made possible by blockchain technology. It is a process that involves fractionalizing real property into tokens stored on a decentralized database called a blockchain. These tokens are similar to non-fungible tokens (NFTs), which are non-interchangeable units of data stored on a blockchain that can be sold and traded, with the exception that real estate tokens are generally tied to the value of a physical asset.

Real estate tokenization adopts the advantages provided by a blockchain system, which ensures that the distributed ledgers on which real estate tokens are captured are validated by the blockchain network, synchronized, and shared with all network participants almost instantaneously, permanently recording an accurate ledger of transactions generally accessible to the public.

Real estate tokens vary from REITs in that, they allow for a specific investment linked to a particular real property, whereas REITs typically facilitate investment into pools of various real estate assets.

Real estate tokens are also traded like normal stocks on an exchange, offering the same advantage REITs provide in terms of liquidity.

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