By: Dave Seeburger, Director of Finance and Investor Relations, NextSeed. Article reposted with permission of NextSeed.
Current passive real estate opportunity on NextSeed, Civitas Greenville Equity Fund
Real estate has historically been a significant driver of wealth, but not all real estate investments are the same.
Real estate assets come in all shapes and sizes. Some require active management from a hands-on investor, whereas others are perfect for a passive partner.
Allocating some of your assets to real estate investing can help diversify your portfolio, and we’ll share some insights into why passive real estate investments can be an important part of an investment portfolio.
People often equate owning a rental house, an apartment, or some commercial property with passive income. This leads to them misclassifying these investments as “passive.”
However, anyone who has dipped their toes into real estate investing can tell you that owning properties is anything but passive.
Even with a professional property manager, the owner bears a lot of responsibility, including:
Ultimately the owner is responsible for managing and fixing anything that can go wrong.
Conversely, passive real estate investing is different since it means not taking an active role in running the business or investment. This can include stocks or ETFs as well as certain types of real estate investing.
Diversification is an important strategy for reducing risk in your investment portfolio. It’s achieved by buying different types of assets or investments. Some investors equate diversification to simply buying a basket of stocks or ETFs. Unfortunately, the trouble with this type of diversification is that in our global economy, many markets are interconnected. A range of ETFs can all be built on the same underlying assets. This “sharing” makes it challenging to build a truly diversified portfolio using only stocks (i.e equities). Recessions like the current one caused by COVID-19 can devastate your 401k and it can take years to recover from these events.
Fortunately, real estate and other types of private investments aren’t directly correlated to changes in the stock and bond markets. Per Zacks, there is little direct relationship between the stock market and real estate values. Thus, a well-diversified portfolio needs some allocation to real assets via physical property or paper assets like REITs. Essentially, investing for passive real estate income can have the added benefit of helping you de-risk your portfolio.
Investment properties generate cash flow from the tenants’ monthly rent payments. After all loans, fees, and expenses are paid; the investors keep the remainder as profit. REITs pay out this profit as monthly dividends, which could be higher than the average dividend-paying stock’s yield of 2%. Investing in professionally managed properties and REITs offers truly passive cash flow since you aren’t actively managing them.
Appreciating real estate can be a great way to build wealth, especially over long time horizons. Property values can increase due to a number of reasons including, but not limited to:
Although inflation causes buying power to decrease over time, real estate investments are often a good hedge against inflation. Property values can increase over time and rents tend to increase as inflation increases.
Real estate investing can come with a number of tax benefits. Any gain generated from the sale of real estate held for longer than one year is taxed at a lower long-term capital gains rate. In addition, a number of expenses are tax-deductible including but not limited to:
There are also investment strategies that defer the payment of capital gains upon sale. Investors, for example, can roll capital gains from one sale into the purchase of a new property with a 1031 exchange, without paying capital gains taxes on the proceeds of the sale.
One of the most attractive advantages of passive real estate investing is the potential of leveraging your investment with debt. Investors can often buy a property for 25% down or less, leveraging a small amount of equity secured by the property to make an investment in a larger asset than they would be able to buy outright. It’s important to note that, while leverage can increase the potential return on an investment, it also increases an investor’s risk.
Experienced property managers can be hired to oversee and manage real estate properties. This can help you feel more confident knowing that your investment is in experienced hands.
It can also help you acquire more physical real estate without sacrificing more of your time.
You can use online platforms like NextSeed to find passive income investments on crowdfunding platforms. While some investments and platforms only allow accredited investors to participate, it’s no longer a requirement to be an accredited investor to access some new opportunities.
Real estate can be a powerful tool to diversify your portfolio and build wealth opportunities. It offers many benefits like lowering your taxable income, protection against inflation, and being able to create passive income.
However, be sure to work with experienced real estate professionals, financial planners, and tax consultants before investing in real estate. Adding this new asset class to diversify your portfolio comes with its own risks and rewards.
Check out our current passive real estate opportunity on NextSeed platform, Civitas Greenville Equity Fund. It is accepting equity investments from qualified accredited investors for the value-add acquisition of a multi-tenant Class B building in the Dallas office market. Despite tremendous challenges presented by COVID-19, the property continues to generate income during the pandemic – in fact, at the close of Q3, it made its third quarterly distribution.
The property is being renovated and rebranded to allow for base rental increases on renewals and new leases in the future. Renovations are estimated to be completed 24 months from acquisition. The target hold period is 48 months, followed by a planned exit via sale or refinancing. Quarterly income distributions will continue to be made to investors in 2020.
As you can see from the map below, 6500 Greenville is in the heart of Dallas:
Note: This offering is made pursuant to Rule 506(c) of Regulation D and is therefore limited to verified accredited investors.
Click here for more information on qualifications and instructions for verifying your accredited investor status.
*For the targeted IRR, View the Executive Summary in the campaign Data Room.