The Complete Guide to Real Estate Investment Vehicles

INVESTOR EDUCATION

Which Real Estate Investment Vehicle is Right for You?

For a well-diversified portfolio, exposure to real estate is an absolute must.

In this article, we’ll be going over some popular investment vehicles such as real estate private equity groups, real estate investment trusts, and real estate operating companies to help you find the right investment for your risk appetite, timeline, and tax situation. 

We’ll define each and explore the pros and cons. To start us off, we’ll talk about real estate private equity, a tax-friendly investment vehicle that isn’t burdened by regulations.

What is Real Estate Private Equity (REPE)?

Real Estate Private Equity is an actively managed fund composed of private and public investments in the real estate sector. They aren’t publicly traded, hence the “private equity” moniker.

While there are no one-size-fits-all real estate private equity firms, REPE is an alternative asset class that typically focuses on high net-worth investors looking to invest for at least five years or more, with a minimum buy-in of at least $50,000. The investment profile is similar to venture capital investing and funds are used to build, improve and execute a value creating opportunity.  Liquidity in that time frame is usually difficult until the investment plan has been accomplished and achieved, While this type of investment carries a higher level of risk, the reward is comparable, and Investors in the fund, are usually looking for an investment that delivers a tax-advantaged  income stream with a higher return profile. Since REPEs are paid out on a regular schedule, they’re a great option for those types of investors.

Furthermore, there are some general characteristics and behaviors that all real estate private equity firms have in common.

  • Raising capital to acquire properties and manage the fund’s operations.
  • Looking for and evaluating potential investment opportunities.
  • Purchasing the properties.
  • Managing them.
  • Selling them.

Now that you have an understanding of what real estate private equity is, let’s get into the pros and cons.

The Pros and Cons of Investing in REPEs

We’ll start with the benefits.

A major pro to investing in a REPE is a set distribution schedule and eventual full reimbursement of your initial investment. In other words, they have a set end-date. They typically produce income for about 5-7 years before the firm repays your initial investment in full. That way, you don’t have to worry about timing the market or anything, and you can expect to receive your entire initial investment back.

Also, they are more favorable for tax purposes. You can write off depreciation since you’re the direct owner of an asset. Other vehicles don’t have that option since you’re investing in shares of a company that controls the real estate. With real estate private equity, you’re actually investing in the property.

Finally, many investors enjoy the specificity and autonomy of investing in real estate private equity groups. At Valiance, for example, you’d be part of a syndication investing solely in a multifamily or student housing building in Texas and California. In many ways, you get the benefits of investing in your own rental property with less management and headache -- and experts on your side.

However, the downside to investing in a REPE is that your money isn’t as liquid as the other options. Typically, a real estate private equity group needs the money to acquire properties, make renovations, and manage the operations.

Pros Cons
  • Income-producing: Set end-date with regular distributions.
  • You can write off depreciation.
  • More autonomy over your investment.
  • Not as liquid. Money is tied up for a few years, at least.

What is a Real Estate Investment Trust (REIT)?

A real estate investment trust is a company that owns and operates income-producing commercial real estate. They invest in, manage, and collect rent on apartment buildings, cell towers, data centers, warehouses, hotels, hospitals, offices, malls, and more. They must comply with certain strict IRS regulations, and they’re publicly traded in large volumes on the stock market.

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The Pros and Cons of Investing in REITs

As we mentioned above, REITs are publicly traded in large amounts. This simple fact gives them one of their most attractive pros: the ability to liquidate. When you invest in a REIT, it’s very similar to investing in shares of a particular company. If the price goes down, you can easily sell whenever you like (although not always at the price you like).

REITs are also required by law to distribute 90% of their profits in dividends, which can be another valid reason you’d like to invest in them. Furthermore, unlike corporate structures, REITs -- since they’re trusts -- aren’t required to pay corporate taxes, making their dividend payouts higher than many stocks that pay dividends.

Diversity is another key reason that many investors like REITs. Compared to buying a single rental property, investing in a REIT spreads your money out among many properties. For some investors, though, the lack of transparency on particular investments can be a drawback. However, it might be offset by the overall diversification of funds.

As for the drawbacks, the dividends that REITs pay out can seriously affect your tax bill. Dividends are usually taxed at the same rate as your individual income, and so they aren’t as tax-friendly as real estate private equity.

On top of that, you can’t write off the depreciation on REITs on your tax bill, like you can with many other forms of real estate investing.

The values of REITs correlate strongly with interest rates. When interest rates are rising, the value of REITs tends to drop. In the near-term, if you expect interest rates to rise from their decade-lows, this might not be an attractive option.

 

Pros Cons
  • Easily liquidated.
  • Required by law to distribute 90% of their profits in dividends.
  • Diversified (compared to single properties).
  • REITs aren’t great for your tax bill.
  • The dividends paid out by REITs aren’t taxed like normal dividends at the capital gains rate. Instead, they usually count as ordinary income.
  • Can’t write off depreciation.
  • REITs correlate with interest rates, and many suspect interest rates to rise. This could be bad news for REITs.

What is a Real Estate Operating Company (REOC)?

Real estate operating companies are similar to REITs in that they’re both publicly traded on the stock market, but they have more flexibility since they aren’t as heavily regulated. They don’t have to distribute their net earnings to shareholders, allowing them to invest in new constructions, remodels, and more.

The Pros and Cons of Investing in REOCs

Investing in REOCs is similar to investing in REITs. As such, they have very similar pros and cons. Let’s dive into it a little bit.

Investing in this vehicle is just as easy as investing in a REIT -- and it’s just as liquid. If being able to pull out your money whenever you like is important to you as an investor, you might want to keep this in mind.

As for the negatives, real estate operating companies are just run-of-the-mill taxable corporations that happen to own and manage real estate. REOCs have more flexibility than REITs, but that means their payout structure varies based on what company you’re investing in. The benefit here, though, is that your dividends may be counted as capital gains tax and not just ordinary taxable income.

REOCs also aren’t very tax-friendly (at least in the context of real estate). Since investing in REOCs is more or less the same as investing in public companies, you can’t write off depreciation.

Also, you don’t get much (or usually any) say of what goes on in a real estate operating company. Since there are so many shareholders, you don’t have much autonomy over any individual investment. With a REIT, this is perhaps more expected.

Pros Cons
  • Easily liquidated.
  • Diversified (compared to single properties).
  • Dividends might be counted as capital gains.
  • Taxed just like a public company. Can’t write off depreciation
  • Don’t have much autonomy over decisions in the REOC unless you make a big enough investment to sit on the board.

Conclusion: Which Investment Vehicle is Right for You?

The “best” investment depends entirely on your own individual goals and scenario. At Valiance Capital, it’s important to us that you make an informed decision with your funds. If you value liquidity above all, investing in a REPE isn’t going to be a great option.

However, if you desire regular distributions, a set end-date, and the ability to write off depreciation, we can offer an investment vehicle that’s perfect for you and virtually unmatched compared to the other real estate private equity groups on the market today.

We specialize in student housing and multifamily buildings in the Texas and California markets, doing all of our construction and management in-house, eliminating overhead and producing as much income for our investors as possible.

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Valiance Capital is a privately held real estate development and investment management company with a primary focus on multi-family and student housing properties.

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2425 Channing Way Suite B
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Berkeley, CA 94704
investors@valiancecap.com

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©2021 Valiance Capital. All Rights Reserved.

GET IN TOUCH

Valiance Capital LLC
2425 Channing Way Suite B
PMB #820
Berkeley, CA 94704

investors@valiancecap.com

Valiance Capital is a privately held real estate development and investment management company with a primary focus on multi-family and student housing properties.

©2021 Valiance Capital. All Rights Reserved.