Introduction to real estate investing

Investing in real estate means owning either land, buildings on that land, or both. 

Real estate typically falls into two broad categories. 

“Commercial” is property used for business. Think offices, retail, warehouses, and hotels. 

“Residential” means places where people live, typically houses and apartments.

Real estate often gets called an “alternative investment” alongside private equity and hedge funds. 

This is because it is considered an “alternative” to investing in equities and fixed income.

However, people have held their wealth in the form of land and buildings for millennia, long before stocks and bonds became a market.


How can real estate generate returns?


Real estate investment returns ultimately come from obvious sources.

First, there’s the rent that can be earned from letting out a building or land.

Of course, this rent is seldom pure profit. 

Typically, a property owner might have to meet many expenses including running costs, repairs, property taxes and interest on borrowing.

Next, there’s potential capital upside. 

Over time, the value of land and many buildings across the economy has tended to rise.

A skillful real estate investor with deep pockets may be able to buy properties when their values are low and sell them later when the market has improved.

(Deep pockets are important as banks may be reluctant to lend at times when real estate is going cheap.)

Likewise, an investor may be able to benefit from redevelopment of the land or property, which may also boost its value.

Another potential source of returns is providing services to tenants.

The tenants may need help in running a property or getting the most out of it. If this help isn’t already included in the lease, some owners may provide it as a service to their tenants.

However there are risks in Real Estate investing and they should be considered.  Alternative investments referenced in this report are speculative and entail significant risks that can include losses due to leveraging or other speculative investment practices, lack of liquidity, volatility of returns, restrictions on transferring interests in the fund, potential lack of diversification, absence of information regarding valuations and pricing, complex tax structures and delays in tax reporting, less regulation and higher fees than mutual funds and advisor risk. 


Real Estate Strategies


Direct ownership

While land and buildings are the underlying assets in real estate, there are many ways for investors to own them.

The most obvious is where investors own and controls a building or site by themselves. 

For significant commercial assets like office blocks, hotels or apartment blocks, this obviously requires a large outlay of capital, probably involving some borrowed money.

The control of direct ownership is appealing to specialist investors.

They may get to choose which properties to buy, set and receive the rent, decide how to develop and pick the moment to try and sell them.

All of this requires deep expertise in building types and knowledge of the area, not to mention lots of capital.

Directly owning significant commercial properties is therefore typically only for the wealthiest investors who possess expertise.


Real estate funds

Instead of buying property directly, investors often buy into a real estate fund. 

This is where group of investors pool their money and share in the profits or losses.

With private real estate strategies, specialist managers buy (and perhaps develop), manage and eventually seek to sell properties.

These typically require investors to tie up their money for several years and carry other risks that should be detailed in the fund offering documents. 

Investors may not be able to get their money back before the set lifetime of the strategy. And if they can, it may be by accepting a big discount or loss on what they put in. 

Private real estate funds also usually have large minimum investment amounts.


Real estate investment trusts (“REIT”)

Real estate investment trusts “REITs” are publicly traded on the stock market.

These organizations typically own a large amount of property, often in one specific sector.

For example, a REIT may specialize in warehouses or office blocks or hospitals or housing.

Stock market investors can thus buy shares across many kinds of real estate or certain sectors they like.

REITs are typically required to distribute 90% of their profits to shareholders as dividends. 

Investors can also benefit from capital appreciation if the REIT’s shares go up although they can obviously also lose money of the value of the REIT declines.


Mutual funds

Real estate mutual funds typically invest in REITs, real estate development companies and other property companies.

Unlike REITs, mutual funds aren’t traded on the stock market but are bought and sold through the manager.

Often, this can happen once daily. However, if a lot of investors are trying to redeem their holdings at once, especially during troubled times, the manager can impose a halt.

This is to avoid them being forced into selling properties to meet redemptions.


Real estate in portfolios

Owning real estate – whether by direct investments, private funds, mutual funds or REITs – can potentially be a source of returns for a diversified portfolio.

And because real estate may be doing well or badly at different times than equities, bonds and other asset classes, it can help spread the risks of a portfolio.

For investors seeking an income, there is the potential for rental payments, dividends or distributions.

Some investors see certain kinds of property as a way of trying to preserve the purchasing power of their money.

Certain types of commercial properties often include automatic rent rises in leases. So, as inflation goes up, so may rents received. However, if rental demand can decrease and expenses of the rental property can exceed rental income, leading to a loss for the investor.


The risks of real estate


Investing in real estate is risky.

This is especially true when it comes to individual real estate projects, such those that direct and private funds invest in.

An individual property redevelopment can easily run massively over budget.

And since projects are planned years in advance, they can sometimes complete just the economy is turning down, making it hard to find tenants.

Total loss of investment is always a possibility.

Liquidity is always an issue with direct and private fund investments in real estate. 

With direct ownership, the investments are especially illiquid. Investors who commit to a major redevelopment cannot typically sell up and walk away whenever they want.

While listed REITs can be traded on the stock exchange and can be used to spread risks across many underlying properties, they are still risky.

A major risk is stock market risk. Because they trade on the market, REITs will often go down when equities more widely fall. 


The bottom line


Real estate has long been an important asset class for suitable investors seeking to diversify their portfolio.

Combined with equities, bonds and other asset classes, it may potentially help seek returns and diversify risks.

The more illiquid and the more direct the investment, the more expertise and capital the investor may require.

Specialist research teams can help investors identify potential direct and private fund investments.

Alternative investments referenced in this report are speculative and entail significant risks that can include large losses.




Real estate can potentially help diversify portfolio.

Private real estate funds tend to have high capital requirements and may lock up investors’ money for a long period.

REITs and mutual funds offer a more liquid way to invest in real estate, but the performance of public REITS may ebb and flow in line with the broader stock market.

It’s important to balance capital requirements, time commitments, manager selection, liquidity, and risk when making real estate investment decisions.

Alternative investments referenced in this report are speculative and entail significant risks that can include large losses.