Whether or not you have money invested in the stock market, you’re likely well aware of the roller coaster ride of stock market investing, particularly over the last several months. Money that seemed to be growing steadily just a few months ago can suddenly be wiped out overnight, disappearing into thin air.
To mitigate that risk, it’s wise to spread out your assets by diversifying your portfolio.
Diversification is an investment practice whose objective is to increase returns and decrease overall risk by allocating capital across investment types and industries. As an investor, it’s important to understand diversification’s value.
Investing in Real Estate Partnerships is a great way to diversify your portfolio because real estate investing tends to be less risky than the stock market and a much steadier investment that is backed by a physical asset. This makes it much more difficult for your investment to disappear into thin air. In this blog we’ll take a look at how to diversify your portfolio with real estate and the value of real estate partnerships.
How to Diversify into Private Market Real Estate
There are several ways to diversify into real estate in the private market, each of which requires different levels of expertise, time commitments, and capital. There’s also an abundance of both short term and long term investment strategies available out there for different types of investors.
Real estate investing can broadly be broken down into two categories: active and passive.
Active Investing
Active real estate investing options for individuals include rental properties and house-flipping. The potential for return is restricted to rental income and appreciation. Additionally, this investment technique typically requires hands-on management and a considerable amount of personal knowledge of real estate.
Active real estate investing often demands large capital commitments upfront and for the length of the investment. For instance, if you purchase a rental property, any money that goes toward buying the property, such as mortgage payment or a down payment, will be tied up in the property for the span of the lifetime of the investment. As an investor you only access the earned principal and appreciation when you sell the property.
As the owner of a rental property, however, an investor also earns through rental payments that usually happen on a monthly basis. A rental property is usually a long-term buy-and-hold strategy and can get you fixed income for as long as you hold it.
House flipping, which is the second most active investing option leveraged by most investors today, is normally completed in a quicker timeframe than a rental property; but it also can come with a lot more associated risk and responsibility.
It requires an investor to buy a property and then adds value to it within a target budget in order to be able to sell it at a profit within a given duration. Any errors can dramatically reduce, or even eliminate, potential returns.
Passive Investing
Passive investing is a type of investment where you can generate income from your investments without significant active participation. Passive real estate investments in the private market are closely related to what’s found in public market investments, like the stock and bond markets, but often have a much lower risk threshold which can make it a more reliable investment.
Passive real estate investors usually contribute only capital while allowing professionals to invest in real estate on their behalf, just like in the case of the stock market. With this kind of arrangement, investors are responsible for their investments alone, which keeps them shielded from the additional liabilities that come with active investing.
For those looking to diversify their portfolios to include real estate without doing a lot of the heavy lifting, there are several passive investment options including:
- Real Estate Partnerships
- Apartment Syndication
- Real Estate Investment Trusts (REITs)
- Remote Ownership
- Trust Deed Investing
Passive investment offers real estate investors more options to diversify their portfolio. This, in turn, offers greater diversification ability than active investments. And unlike active investment techniques, which earn returns fundamentally through rental income alone, passive investments can hold debt investments, which can also earn returns through loan interest payments in the long run.
Passive real estate investing can be a great fit for investors who want to realize the benefits of owning real estate without having to directly manage or own the property. Some of the benefits of passive real estate investing are:
- Access to investment-grade properties that are difficult for smaller investors to purchase on their own
- Requires minimal knowledge of managing investment real estate
- Easier to diversify by investing small amounts of capital in multiple projects
On top of these benefits, certain passive real estate investment options have far lesser investment minimums. This makes it easier for investors of all sizes to choose from a variety of investing options.
Connected to the first benefit mentioned above the rest of this blog will focus on real estate partnerships and apartment syndication.
Investing in Real Estate Partnerships
A real estate partnership is in essence a business entity created for the purpose of pooling resources to invest in a real estate development project. Many real estate partnerships are designed for purchasing property, though there are rental property partnerships as well.
A real estate partnership is a way of holding title to and managing an investment property. Most real estate partnerships are structured as limited liability companies (LLCs), but can also take the form of a limited liability partnership (LLP) or S-Corp. Each has different tax benefits and implications.
What’s most important about a real estate partnership, though, regardless of which form it takes, is how the roles and responsibilities of investors are defined. Typically, real estate partnerships are structured so as to have a sponsor or managing member who serves as the general partner whereas all other investors take a backseat role as passive, or limited partners.
In other words, there are different types of partnership. Some partners are actively involved in projects, while others – often called silent partners – might simply partner up by providing money for a project. But if two (or more) investors are actively partnered together, they can bring their resources and experience together to create a more rewarding portfolio.
Real estate partnerships can provide extra capital and experience while reducing the burden of running a real estate business. This is especially true for a real estate investor who is just getting started as much as it is for someone with years of experience searching for the next investment opportunity.
Apartment Syndication
Apartment Syndication is a type of real estate partnership that we here at Black Girls Buy Houses are actively involved with. And, it’s an option that we make available for those interested in investing in real estate partnerships.
Apartment Syndication is the pooling of funds from numerous investors that is used to buy an apartment building and execute the project’s business plan. It is used when buying large apartment buildings or communities that would be difficult or impossible for individual investors to purchase on their own.
It allows companies like ours to pool our resources with others and share the risks and returns. In particular, we like to focus on projects that address the affordable housing crisis in America. The major investor benefit of apartment syndication is that, unlike investing in the stock market, it provides a low risk, stable, and predictable return on investment.
Who wouldn’t love to benefit from owning an appreciating asset, like an apartment complex, that provides cash flow and a fixed rate of return? However, very few people have the ability to purchase a big apartment complex on their own. This is why joining our real estate investment group makes so much sense.
Bottom LineÂ
We’re pleased to work with you and help you diversify your portfolio by investing in real estate partnerships and more! To learn more about Apartment Syndication or our current projects give us a call at 202-800-4475 or, if you’re ready to get started investing click here and answer a few questions to determine if you’re a qualified investor.