What are the advantages of private real estate investments?
Private real estate investors enjoy many benefits over their peers who are solely invested in such conventional investment vehicles as stock and bonds. Once they’ve tasted the respectable risk-adjusted results, none ever wants to look any further.
What Is Private Real Estate Investing?
The traditional way of investing to which many retail investors have defaulted is in publicly traded securities such as stocks and bonds, often by abdicating their choices to financial advisors.
Most notably, private real estate investments are not publicly traded, alleviating the volatility of the public markets Private real estate involves direct ownership in various asset classes ranging from single-family homes to multifamily apartments, office buildings, and warehouse facilities, with the intent of making a profit. Investors can invest in private real estate by acquiring assets directly as an active buyer, or passively in partnership with a private real estate investment firm, an online crowdfunding website, or a non-traded private Real Estate Investment Trust (REIT).
The Benefits Of Private Real Estate Investments
Now that you’ve become somewhat familiar with what private equity real estate is, the next step is to take a look at several perks and notable advantages that prove appealing to private real estate investors. Similar to any other type of investment opportunity, there are always benefits and risks to consider. Doing thorough due diligence before making an investment decision will give you a leg up to determine whether it’s worth adding private real estate investments to your portfolio.
Cut Out The Bank and Middleman
Most average individuals who see equally average results typically just leave deposits in their bank or hand over their financial futures to mutual funds or stockbrokers, or 401k plan managers. These accounts usually yield poor returns, managed by organizations with no fiduciary responsibility to work in their clients’ best interests. Managers make all of the profits, and if there is anything left after all the taxes and fees, individuals may see some low rate net returns after letting these organizations play with their money.
Private real estate investments mean you can make those same moves but cut out all of the adverse factors that eat up your returns.
Think about your bank savings account. You let the bank play with that money to amplify its profit in exchange for a meager interest payout. You might feel lucky if they pay you 1% interest on that these days.
Higher Net Returns
Private real estate investors get to cut out layers of commissions and fees and enjoy the same levels of returns those professional investors get. You are often making 12% or greater annual returns.
For example, according to data from Bloomberg, a $10,000 investment in private real estate made in 2000 would have grown to about $42,000 in 2019. That same $10,000 investment in the S&P 500 would have been worth around $35,600.
Taxes
The real estate investment gives you access to a variety of tax savings and benefits. These depend on whether you organize as a business and take those deductions or invest through vehicles like self-directed IRAs. For example, income generated by properties is generally offset by depreciation, offering the long-term benefits of substantial cash flow and less tax burden.
As with all tax matters, it’s prudent for investors to consult with their CPAs about the benefits that are available based on their unique circumstances.
Control
Perhaps one of the most important benefits is having real control over both what you are investing in and who you are investing with.
You can choose to invest with people you trust and share your values while picking investments that make sense and fit your financial goals.
Lower Volatility, More Reliability
While all assets can fluctuate in value, public markets are notorious for their hyper volatility. As we’ve recently seen with cryptocurrencies and some IPO stocks, they can go down by 30% or more in a single day, just because of one tweet. They also offer zero downside protection. You can be wiped out, with nothing left to reinvest or recoup.
Private investments put you closer to the collateral. The underlying real estate will never go to zero and has continued to prove it will typically go up in value over the long run, thanks to both appreciation and inflation.
If you are investing to build up a nest egg and passive income for your financial future, private investment can be the viable way to gain the comfort that it will be there when you need it.
