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February 14, 2020

Why More and More People are Choosing Indirect Ownership of Real Estate for Wealth Creation

“Buying real estate has made me rich,” says Barbara Corcoran, founder of the Corcoran Group and a judge on Shark Tank. Corcoran is not alone in believing that investing in real estate will help you build wealth. The Oracles, a brain-trust of leading entrepreneurs who write for Forbes magazine, also tout the advantages of investing in real estate.

But for many who aren’t already wealthy and who work day jobs, being an active investor isn’t an option. For one thing, you need to come up with a down payment and loan to buy a rental property. Then you may also need to renovate the property, find tenants, manage it and hold it for several years to make top dollar on your investment.

Active investment by yourself or with a few partners, however, isn’t the only way to own real estate. Another way is through real estate investment trusts (or REITs). REITs, through management teams, buy, renovate, manage and sell a portfolio of properties. More and more people are investing in REITs for several reasons.

Ease of Qualifying

Investors can purchase shares in a REIT for a relatively modest amount of money. They don’t have to qualify for a mortgage or renovation loan or go through the process of buying a property on their own. Many REITs are open to anyone, regardless of accreditation or prior real estate experience.

Diversification

Because REITs are composed of many properties, an investor of modest means can gain a diversified portfolio. Diversification of an investment portfolio is an important way to reduce financial risk. If an investor owns an apartment building by himself, he becomes liable for all losses sustained. However, with a REIT, her loss is limited to her actual investment. Additionally, the ownership of multiple properties means that financial challenges at one property would be mitigated by gains at another.

Professional Management

Investors in REITs do not have to do their own research to determine if a property is a good investment or not. Sophisticated management groups, with proven track records, do the work for the investors. Real estate performance is typically predicted through formulas that consider factors such as proximity to mass transit or unit size. REIT fund managers understand this and know how to use it to determine which properties will appreciate the most over the long term.

Headache-Free

Indirect owners through REITs avoid many of the headaches that direct owners have, such as finding and screening tenants, or having to manage or hire someone to manage the property day-to-day. Investing in a REIT is a passive investment. You just invest your money, wait a few years, and collect your returns.

An Example

The real estate team at DiversyFund is experienced in commercial real estate and has a professional team acquiring and managing the Growth REIT’s properties. The fund acquires buildings that are already producing income but need renovation. The team renovates the properties, which further improves cash flows. The fund lets the properties appreciate naturally over time, then sells them at a higher price.

Projects typically have a projected five-year term and individual investors can buy into the REIT for $500.

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