When investors consider diving into real estate investing for the first time, the first thought that comes to mind is flipping homes because that’s what they’re bombarded with on late-night infomercials, on the web, and on social media.
However, another option presented to them typically comes from their financial advisor or broker, and that option is to invest in commercial real estate through public REITs.
There is another real estate option that the ultra-wealthy have for decades for their portfolio that offers advantages over flipping and public REITs and that option is private real estate.
Private real estate offers investors the opportunity to participate in the commercial real estate class that flipping doesn’t. In addition, investing in a private fund sponsored, promoted, and operated by real estate experts eliminates direct investment headaches like flipping or buying a property yourself. And compared to REITs, private real estate shields investors from Wall Street volatility.
Here are the top reasons for investing in private real estate:
Income and Growth.
Commercial real estate offers the twin benefits of consistent income from leases and long-term growth from appreciation. Both elements are essential for building wealth in a portfolio. Long-term investments ensure consistent, reliable income and appreciation over the long run. If invested in the right markets and asset segments, they can also hedge against recessions and inflation in the short term.
Real estate, like physical businesses and farms, is a tangible asset you can touch and feel. Tangible assets have an underlying value that’s not dictated by what a capricious investing public is willing to pay for it. There will always be a demand for tangible assets like shelter and workplaces. Unlike intangible assets, the value of tangible assets can never go to zero – making them safer bets than public equities.
Real estate has long been incorporated into investment portfolios for its consistency, reliability, and non-volatility for balancing and diversifying risk to maximize returns.
However, private real estate takes this one step further. Private real estate offers above-market risk-adjusted returns because it lends itself to multiple levels of diversification – diversification across asset segments, asset condition, price levels, geographic locations, compensation type, and fund structure. This is only possible through the leveraging of the expertise of others through multiple private investment funds.
Private real estate funds provide investors who don’t have the time or the labor for investing directly the opportunity to invest across multiple assets that minimize risk while providing high returns.
In addition, this type of diversification ensures continued cash flow even through downturns as performing assets can pick up the slack of any non-performing assets.
Volatility measures the range of price swings for a particular asset. Stocks are subject to extreme volatility because of their public and liquid nature – susceptible to extreme fluctuations influenced by the news, social media, and economic indicators.
Unlike stocks, private real estate is not liquid – with typical lockup periods of at least 5-7 years. This illiquidity protects private real estate from herd behavior because investors can not liquidate their holdings on a whim. Thus, it protects them from themselves. This ensures a consistent and reliable flow of income and appreciation – insulated from the broader market.
Private real estate offers an array of tax benefits other investment vehicles don’t. Typically structured as partnerships, deductions and credits such as depreciation and expenses like operating costs, insurance, and travel are allocated to the investors pro-rata at the partner level.
Long-term gains are also taxed at capital gains and not at ordinary rates. In addition, investments in Opportunity Zones also offer significant tax savings and deferral benefits.
There’s a reason savvy investors have been investing in private real estate for decades.
The mix of above-market risk-adjusted returns from income and appreciation, tax benefits, and diversification, all backed by a tangible asset and shielded from Wall Street volatility, is unmatched by any other asset class or real estate investment option.