5 Ways to Make Money in Real Estate
Learn how NNN investments stack up to other real estate investment options.
The big question facing many investors these days is not why to invest in real estate, but where. Institutions and individuals alike have long recognized the many advantages of investing in real estate. At the top of the list, real estate is commonly used to diversify and stabilize investment portfolios, generate steady cash flow and build generational wealth. So, what’s the best path to make money in real estate? Investors have numerous options in both private and public markets. We take a closer look at five different options.
#5 REIT stocks: Public REIT stocks (real estate investment trusts) are often starting point for retail investors. It is an easy way to dip a toe in the water to invest in real estate. In fact, approximately 145 million Americans invest in REIT stocks through their 401(k) and other investment funds. REITs are companies that own or finance income-producing real estate across a range of property sectors. According to Nareit, publicly listed REITs own approximately $2.5 trillion in assets, representing more than 500,000 properties.
Advantages: REITs are a highly liquid way to own real estate. Investors can easily buy and sell REIT stocks with a click of a button.
Disadvantages: REIT values – stock prices – are susceptible to volatility in public markets. Stock prices can surge or fall based on negative news headlines or missed earnings. In 2020, U.S. REIT stocks posted returns of -5.1%, according to Nareit.
#4 Private equity funds: There has been a proliferation of private equity real estate funds in recent years. These funds come in all shapes, sizes and strategies from big name institutional funds run by the likes of Blackstone to smaller “club” deals that might invest in a single asset.
Advantages: PE funds provide all of the usual benefits to direct real estate ownership, including tax benefits and pass-through income.
Disadvantages: They lack the liquidity you can get in REIT stocks. The hold period is usually dictated by the fund manager.
#3 Crowdfunding: This is a relatively new sector that is generating a lot of buzz. What’s it all about? The basic premise behind crowdfunding is to raise capital from “the crowd” or a large group of individuals. Crowdfunding is basically a platform that brings efficiency to real estate fundraising by using technology to build a bridge between sponsors and a large pool of investors. It was created by the Jumpstart Our Business Startups Act or Jobs Act in 2012, and it remains a small, but growing niche sector of the real estate investment market.
Advantages: One of the aims of crowdfunding platforms has been to bring institutional quality investment opportunities to the little guys, even if the little guy only has $1,000 to invest.
Disadvantages: Investors have to navigate a gauntlet of crowdfunding firms that have crowded into the space. Some early entrants have already dropped out. It takes some work to find reputable firms that have an established business model. Many of the top crowdfunding groups are only open to accredited investors.
#2 Direct ownership: Investors can choose to invest directly in property either on their own or with co-investors or partners. Although cash available to invest can limit choices, investors can invest across a wide spectrum of different types of real estate from land to income-producing rental houses, apartments, restaurants, retail, office buildings, industrial and self-storage.
Advantages: In addition to the usual advantages of real estate ownership, such as being able to take advantage of appreciation, tax advantages and a step-up in basis when passing real estate to heirs, many investors like the control. Direct ownership allows investors to be in the driver’s seat in making investment decisions.
Disadvantages: On the flip side, the biggest advantage – control – also can be the biggest disadvantage. Control means taking on the work of actively managing properties. That active management often comes with headaches of dealing with the three “Ts” – tenants, trash and toilets.
#1 Net lease assets: Net lease real estate, aka triple net lease (NNN), is a specific property type that falls under that larger direct ownership umbrella. It represents a $68+ billion dollar industry and is continuing to grow year-over-year, according to Real Capital Analytics. Net lease properties are occupied by a single tenant that typically signs a long-term lease, often 15-20 years or longer. The triple net lease puts responsibility for the cost and work associated with paying taxes, insurance, maintenance and repairs squarely on the shoulders of the tenant. The NNN market encompasses retail, office and industrial assets – including big name tenants such as Walgreens, 7-Eleven, Taco Bell and Dollar General among others.
Advantages: Investors love the steady income and “hands-off” management that these assets deliver thanks to the NNN lease structures. The landlord (investor) simply collects monthly rent checks and enjoys passive income with practically zero management or landlord responsibility.
Disadvantages: It is a highly competitive market, and bidding can be fast-paced and aggressive. It is important to work with an experienced broker who can help you to navigate the market competition, negotiate terms, and help you find an investment property that meets your investment objectives.
Whether you are a seasoned real estate investor or just getting started, it may be advantageous to explore whether NNN investment could be an ideal fit for your financial and lifestyle objectives. Please contact Andrew Vu at 415-539-1120 for a complimentary strategy consultation.