For investors wanting to foray into real estate investing, the traditional route of purchasing an investment property may seem daunting due to a few pain points that make it more complex and less accessible to investors. The traditional route of real estate investing requires investors to source for the investment property by themselves, have the relevant expertise in the real estate market and property type of their choice, a huge initial capital to purchase the property and active management of their property. Additionally, most investors would not be able to properly diversify their portfolio due to the high prices of investment properties.
Fortunately, there are alternatives, such as real estate co-investing and real estate investment trusts (REITs), that seek to address the pain points of traditional real estate investing. Although there are many similarities that both real estate co-investing and REITs share, there are some differences that may lead investors to prefer real estate co-investing to REITs.
Strength of REITs
There are some aspects to REITs that make it more attractive to investors. Firstly, REITs are liquid assets. REITs are typically traded publicly on major securities exchanges and they are easy to buy and sell. Real estate co-investing on the other hand is more illiquid since some co-investment platforms have a specific minimum holding period and properties under co-investments are typically disposed of only after the specific holding period.
Secondly, REITs require a lower minimum investment as compared to real estate co-investing. The minimum investment requirement for REITs is usually $1,000, making REITs a popular form of real estate investing amongst retail investors. While real estate co-investing has a lower initial capital requirement, usually $20,000 - $25,000, as compared to traditional real estate investing, it is still higher than the minimum investment required for REITs.
Thirdly, due to the ease of buying and selling of REITs, it minimises the timing risk that investors experience. However, for real estate co-investing, there is usually an investment window for investors to place their investment. When the investment deal has reached its target and is fully subscribed, investors would not be able to place any additional investments in the property.
Strength of Co-investment Platforms
Similarly, co-investment platforms have certain advantages over REITs that lead investors to favour them. Firstly, real estate co-investing offers investors more control and transparency over the decision making process. Investors have the power to invest in properties that suit their preferences from the real estate market, property type, the investment’s risk profile to the investment strategy.
When investing in REITs, a high level of trust is required as the REIT managers are in control over the assets under management (AUM) and have the power to decide which properties to acquire or divest, potentially affecting the profitability of the portfolio. Furthermore, REIT managers typically have a compensation package tied to the AUM. This gives REIT managers an incentive to increase the AUM just to receive a higher compensation.
Secondly, real estate co-investing presents investors with a more diverse opportunity set. Most co-investing platforms have investment deals from various real estate markets, property types, investment strategies, risk profiles and different kinds of investment opportunities, such as real estate debt funds and not just investment properties alone. However, REITs are mostly focused on income producing assets that are usually within the core segment of real estate investments. This reduces the types of investment properties that will be added to the portfolio of REITs.
Thirdly, real estate co-investing is largely insulated from stock market fluctuations. However, publicly-traded REITs are exposed to fluctuations in the stock market and the price of REITs may be volatile. One example would be the COVID-19 pandemic that negatively affected retail and office REITs, causing a sharp dip in the price of REITs.
Investors who wish to have more control and transparency over their funds and to better diversify their investment portfolio would prefer real estate co-investing to REITs. To get started with real estate co-investing, investors would need to source for a reliable co-investing platform. An example of a reliable and award-winning real estate co-investment platform is RealVantage, where investors can choose to invest in a wide variety of real estate investment deals across different real estate markets, property types and investment strategies.