Real Estate Investment Companies: Are They Worth It?
Real estate investment companies come in many different shapes and sizes. You can invest in the following real estate vehicles to gain exposure to real estate investing:
Real Estate Investment Trust (REIT): Can be traded like a stock.
Mortgage Investment Corporation (MIC): Pools together investor money and invests in mortgages.
Investment companies: These companies invest in specific property types and typically give investors fixed rates of return.
Private lending: You can become the bank and lend out your money through private lenders for higher rates of return.
Lets take a closer look at the types of things you need to consider before investing in any of these types of real estate investment companies. Due diligence is the best way to ensure you don’t lose your hard earned savings!
Real estate investment companies usually invest in a variety of properties. They can invest in commercial grade buildings such as office suites, multi-family apartments, hotels, industrial buildings, retirement estates. Some specialize in niches such as medical facilities, malls or even fast food properties.
Types of Real Estate
We can categorize real estate into four main categories:
Commercial real estate
Industrial real estate
Residential real estate
Commercial real estate as the name suggests encompasses properties owned to produce income for the owners. They also include buildings where business activities take place. Some of these include shopping centers, educational buildings, hotels, offices and even some apartment buildings.
Industrial real estate includes warehouses, manufacturing facilities, etc. The properties can be used for storage and distribution of goods, assembly & manufacturing, research, and development, production facilities, etc.
Residential real estate is mainly involved with properties used for day to day human habitation. They can be new or resale homes, condominiums, townhouses, vacation homes, beach condos, single family homes, duplexes, etc.
Land includes ranches, working farms, vacant land. Some of the sub-categories of land as a real estate investment category encompass undeveloped land, subdivision land, early development and reuse land parcels, etc.
Real estate is a factor of production and hence has a significant effect on the economy. By some estimates, construction of new properties contributes 7 percent, or $1.3 trillion, to the U.S. economy.
Top Real Estate Investment Companies
Real estate investment companies range in size, type, employees and the property under management, etc. These companies can manage anywhere from $1M to tens of billions worth of properties.
Typically real estate investment companies have a core team(s) of real estate investment professionals. The units can comprise 4 or more people to handle the various aspects that come with property investment.
Some of the most prominent real estate investment companies (and the best known) include:
Brookfield Asset Management
JP Morgan - Global Real Assets
Lasalle Investment Management
UBS Asset Management
Participating in a Real Estate Investment Company
Anyone who buys or sells a property is engaged in real estate investment. Some people start with just their home and then flip that into something else. Others own several homes and rent them out.
It's not just those with deep pockets that invest in real estate. You can also participate as an investor through a REIT (Real Estate Investment Trust)
A real estate investment trust is typically a company that owns, operates or finances income-producing real estate with certain regulatory guidelines.
To start a real estate investment company, keep in mind some of the factors that might affect your investment. Anything from the location, future interest rates, how taxes affect you, business cycles, etc.
If that gets too complicated, you can start small by renting out a room in your home through platforms like Airbnb, etc. This should teach you the ropes of property management and maybe catapult your career into a full-fledged real estate investment company.
Check out this guide to the basics of starting a real estate investment company.
Real Estate Investment Companies - The Risks
As with any investment, real estate investment companies come with their share of risks. Some of these include:
Geographic risks - The real estate investment company is invested in an area that's tanking regarding value and appreciation. Demographics, job growth, population among other factors can affect the value of properties.
Market risks - Real estate investment is cyclical. It's characterized by up and down market cycles. Sometimes bubbles develop that later bring catastrophic effects. Market risk can also be brought about by a dip in demand or a slowing economy or even higher interest rates.
Debt risks - Gearing is standard in real estate investments. This means that real estate investment companies utilize debt to acquire and renovate properties. However, too much debt can lead to foreclosures if the company cannot honor it's repayment obligations. The debt might mature at an inopportune time leading to mortgage default etc.
Construction risk - The real estate investment company might incur cost overruns, or the property construction can take longer than expected. To invest correctly, ensure that the real estate investment company has ample experience managing construction projects.
Cap rate risk - The cap rate is a ratio of the net operating income and the current price of a property. It helps determine the potential return on investment. Pay close attention to the entry and exit cap rates to minimize the risk.
You can read about more real estate investment companies risks here.
Whether real estate investment companies are worth it comes down to your personal experience and knowledge of the real estate sector. The reputation of the company also comes into play. So choose carefully. Ultimately, whether you want a real estate investment company to manage your condo or you intend to invest through them, take your time to research them. It will save you lots of headaches in the long run with your property.