Real estate investing is a popular way to earn passive income and build wealth. And not a week goes by that I don’t get a phone call or a message from someone excited about the potential of real estate investing.
Maybe they read Robert Kiyosaki’s books, researched the solid historic returns, wished to diversify from the stock market, or wanted to invest in something real. The list goes on: passive income, OPM, appreciation, and a hedge against inflation. Nearly 20 years ago, after understanding “why real estate,” I started my investing journey. It’s a great asset class and a way to invest for the future.
People are often sold on the asset class but need help figuring out how to get started.
They’ll have to decide whether to find, acquire, and manage their investments on their own or whether it makes more sense to invest passively with the help of professionals through a fund or syndication. Do they DIY? Or would it make more sense to partner with professionals?
So what does the data suggest? What happens when you weigh the pros and cons? Investors are often surprised.
My partners and I have invested and continue to invest both ways. We have some passion projects that we love, but that’s different from how we allocate the bulk of our capital. And I’ve got four reasons investing through a professionally managed real estate fund may be a better choice for most investors.
- Time and Effort: I include this as my first reason, as it is so often overlooked. People love to talk about returns and all the positive attributes of real estate, but it is crucial to count the cost. When allocating capital, it’s critical to factor in time and effort within those investment decisions. If they lack the time or desire to DIY, that decision is easy. There are great investment options that are entirely passive. According to a study by the National Association of Realtors, the average landlord spends 13 hours per month on property management tasks. Thirteen hours per month is a massive time commitment, especially for those with other responsibilities such as work, family, and other obligations.
- Higher Returns: Next, and among the most surprising benefits of investing through a professionally managed real estate fund, are higher average returns. According to a study by the National Council of Real Estate Investment Fiduciaries (NCREIF), professionally managed real estate funds have consistently outperformed individual rental properties in terms of total returns. The study found that over a 20-year period, these funds had an average annual return of 12.4%, compared to 7.4% for individual rental properties.
- Diversification: Another benefit of investing in a fund is the level of diversification it provides. Diversification is vital in real estate investing, as it allows you to spread your risk over different markets and property types. A study by Preqin found that professionally managed real estate funds typically invest in a diverse portfolio of properties, with an average of 30 to 40 properties per fund. Diversification can mitigate risk and increase the chances of success. As a real-life example, a single investment in the most recent Gratūs fund currently invests in 400+ multifamily units in four cities and two states.
- Lower Default Rates: Additionally, a study by the Urban Land Institute found that professionally managed real estate funds have a lower default rate than individual rental properties. The study found that the default rate for professionally managed funds was 2%, compared to 5% for individual rental properties.
DIY spells DON’T
I mentioned that I have some DIY holdings. Specifically, I love our real-estate passion projects, such as building a retreat center, a little glamping project and Airstream restoration, and waterfront/recreational properties we Airbnb when not personally enjoying them. I love these projects, and I hate them. They eat my time. They drag me away from the people I love. I am continually surprised that they cost more and take longer than I imagined. And so, our family evaluates them more as a family/lifestyle decision than a purely investing decision, and I’d encourage investors to do the same.
The data suggest that DIY spells DON’T for most potential investors. Add together the time and effort required to handle DIY investments with higher average returns, diversification, and other benefits of a fund. It builds a compelling case that investing through a professionally managed fund is a better choice for most investors.