Three Methods of Owning Real Estate as Part of a Portfolio Strategy.
When considering ways to invest in real estate, there are several options available. Depending on individual goals and objectives, a real estate strategy may involve owning real estate in a variety of ways. Three of the most popular are: direct ownership (often through a company), in a limited partner position and/or a security position (REIT). Each of these own distinct advantages and disadvantages, mostly measured in risk exposure, and should be carefully considered when making an investment.
Direct Ownership (Highest Relative Risk, Compared to Methods on this List)
When an individual chooses to invest in real estate by outright ownership, they become the legal owner of the property. The property may be owned under a variety of structures, such as under an LLC. This option provides an investor with the greatest level of control over their investment, as they are able to directly manage the operations and make decisions related to the property as they see fit. This may also allow for the owner to reap the highest financial reward. However, it also represents the highest risk because owning a property can represent a large up-front capital investment, ongoing expenses, emergencies, and compliance are the obligation of the proprietor. A proper business plan must be implemented and actively managed in order to preserve the investor’s return.
Limited Partnership Positions (Varies in Risk Depending on Project, but is the Relative Medium when Compared to this List)
A limited partner position is usually a capital-only position, but can reap similar rewards to direct ownership. Limited partners are typically pooled together to invest in a larger and/or more complex real estate project. Depending on the sponsor (the person or entity who is bringing the project together, often the general partner), the investment may involve purchasing core properties, value-add properties, land for new construction and varies in size and scope. No matter the project, the limited partner position is usually a passive one, where the sponsor is responsible for the decision making but capital risk is beared by everyone participating in the project. However, if the project is successful, capital rewards are also distributed to all. In this way, limited partner positions straddle the middle between higher and lower risk and higher and lower direct effort.
REITs (Lowest Relative Risk for Methods on the List)
REIT’s allow investors to efficiently diversify their real estate holdings. By purchasing stakes in Real Estate Investment Trusts, investors can take advantages of securitization while owning real estate, providing for a lower up-front capital cost. REITs are largely passive investments, allowing individuals to sit back and receive income from their holdings and are often owned as a stock, allowing for the quickest liquidation of the three methods listed here. Owning REITs are typically the preferred position of those who want real estate in their portfolio, but with relatively low risk.
In conclusion, there are several ways an individual can invest in real estate. Your ownership type will largely impact your effort, level of responsibility, capital requirement and reward potential. Generally, it is advised to work with your financial advisor and attorney to determine what strategy is best for your portfolio. However, with careful consideration and adequate research, real estate ownership can provide a rewarding investment to those looking to diversify their portfolios.
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This publication was created with the help of artificial intelligence software, which was then reviewed and edited for accuracy by a Team Sobiko staff member.
