Direct and indirect investment: types of real estate investment

When we talk about real estate investing, we mean Direct and indirect investment , but we usually refer to direct investment. This is when you have direct ownership of the property. If you go and buy property on your own or if you partner with friends and buy property under your partnership, it is a direct investment.

Indirect investment involves purchasing shares in real estate fund , such as buying shares in a publicly traded real estate investment trust (REITs). Real estate traded funds own and manage portfolios of many real estate properties.

These trusts contain managers who oversee the purchase, management and eventual sale of the property while the income generated is distributed to the shareholders via dividends.

Therefore, investing in REITs is investing in the owner’s operating profitability and not directly in assets The fundamentals are the same because owning the stock gives you a claim to a share of the fund’s profits but not any direct ownership of the actual property.

Direct investment

Direct investment means buying a stake in a specific property, which can be a single asset or a portfolio of assets.

A single real estate asset is defined as a single property excluding residential real estate which has less than 4 units.

The real estate portfolio is a collection of Real estate investments which are owned by a single individual or company and which share the same financial objectives.

The advantages of owning a real estate portfolio over a single asset are the potential for diversification of return expectations; If one asset does not reach its target, it may offset other investments. The total expected returns of the portfolio aim to achieve a balanced return from the various properties over time.

Two risks are distinguished within the asset portfolio: Specific risks and systemic risks. The risks identified are unique to each sole proprietorship and are independent of each other. In a portfolio of multiple assets, these risks vary between each property. For its part, the systemic risks are unavoidable. is a mile assets To move together and bond. The main systemic risk is the market itself.

Direct investments have the advantage of being more attractive to institutional buyers, as they are usually of a larger size. Investors have more control Make decision They can select the asset according to criteria such as location, asset type and strategy with full transparency of information.

However, direct investments are usually less liquid. Investors must hold the asset over a period of years and cannot sell it in the meantime.

Direct investing gives a greater sense of control.

In private investing, you are in the driving seat. You will choose properties according to your investment criteria. You choose the location, type of assets, financing structure, investment strategy, exit plan, … everything.

Direct investing gives individual investors the opportunity to invest in what they know and are passionate about. For investors who prefer total control, direct investing is the only way to go.

In contrast, buying shares in a fund or REIT is equivalent to investing in the broader investment strategy of the entity as all decisions are made by fund managers. You will have little or no control over any investment decisions.

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Indirect investment

Indirect investing usually involves buying shares of a fund. We distinguish the usual boxes and blind collectors. Investing in a fund means investing in a fund that then invests on behalf of several investors.

Fund managers find projects that meet predetermined criteria. For its part, blind crowd investing refers to investing in a fund that does not tell investors what kind of business they want to pursue.

Investors interested in this type of investment are usually the ones who trust the sponsor and do not want to get involved in the deal by choosing the deal.

The biggest advantage of indirect investment is that it allows investors to invest smaller amounts than direct investment. Moreover, it is more liquid as it allows investors to easily buy and sell their shares and requires low management costs. However, in both, the investors have no control and little knowledge about the investments.

Indirect investment provides better liquidity.

Among the top four major investment asset classes – Stock Andbond Cash and Real Estate – Real estate is associated with the least liquidity.

If you own rental property, you can’t easily convert that investment into its cash equivalent – you’ll have to prepare it for sale, market the property, get offers, go through the negotiation process, and finally enter escrow and closing. The process can take months.

However, this generalization mostly applies to the direct method of investing – where you own the underlying real estate assets. For indirect investments in REIT stocks, they are as liquid as stocks and can be quickly sold on the open market within minutes.

Liquidity is important for investors who have shorter investment horizons or if they anticipate that they will need liquidity soon.

Indirect investment provides better diversification.

Diversification in investing is the idea of ​​not putting all your eggs in one basket to spread the risk of investing.

Just imagine you have $100,000 to invest. You can put it all into one investment or spread that out over $10,000 investments. From this perspective, it is easier to diversify indirect spending.

Buying REIT shares allows you to easily invest in multiple REITs that have different investment strategies covering a wide range of asset classes in different geographic markets.

Investing directly for most investors means having to put more of their investable money into fewer investments, thus concentrating investment risk. If an investment goes wrong, it amounts to a larger percentage of your total investment portfolio.

Most investors prefer some level of diversification. But for investors with a very long horizon and a high tolerance for risk, they may want to focus their investments to maximize their potential returns.

Indirect investment is easier to get started

Investing in real estate takes capital and time. Even if you are making a “minor” investment like buying a property with rental income, it can take tens or even hundreds of thousands of dollars in initial capital.

But how are REIT shares bought? It’s like buying shares in a company. You open an investment account and are ready to invest even a few hundred dollars.

Direct and indirect investment – conclusion

However, both direct and indirect investments are driven by market trends and investment strategy.

The period of holding an asset for example will depend more on the investment strategy (primary, value added, opportunistic) than on the type of investment (direct or indirect), although indirect investments are more liquid.

Regarding the global transparency of information, it depends on the country. Germany, for example, has more data restrictions than the United States and the United Kingdom; Thus information about investments can be affected.

One method is not better than the other. Investing in real estate will always be about making trade-offs and deciding what works for you.

Direct or indirect investment requires action swaps Regarding liquidity, diversification, ease of start-up, and a sense of control.

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