Is There Such a Thing as Third-Party Real Estate Investing?

by | Apr 9, 2024 | Accredited Investor, BAM Blog, Blog, Real Estate Investing | 1 comment

Is Third-Party Real Estate Investing Real?

From buying and selling properties to renting them out for passive income, there are numerous strategies for making money in the real estate market. With the right approach, real estate can be a lucrative avenue for investment.

Real estate investing involves purchasing, owning, managing, renting, or selling real estate properties. But instead of using it as a primary residence, investors use the property to generate a return on investment (ROI). It’s a popular form of investment due to its potential for long-term appreciation, passive income through rental payments, and various tax benefits. [1]

One common strategy in real estate investing is purchasing a residential or commercial property and then renting them out to tenants. Rental income provides a steady cash flow, and properties can appreciate over time, increasing their value.

Investors typically own multiple pieces of real estate. Sometimes one of them will be used as a primary residence while the others are for generating rental income. [1]

Other investors focus on flipping properties. This strategy involves purchasing properties below market value, renovating or improving them, and then selling them at a higher price to make a profit. Flipping requires careful market analysis, renovation skills, and an understanding of local real estate trends.

But what about third-party real estate investing? Many investors are curious to see if it is a viable option for them. Here we are going to discuss third-party real estate investing and how they work.

Understanding Third-Party Real Estate Investing

Third-party real estate investing is also known as indirect real estate investing. It involves investing in real estate assets through a third-party entity rather than owning the properties directly. This can take various forms, including real estate investment trusts (REITs), real estate crowdfunding platforms, real estate mutual funds, and real estate syndication. [2]

Most third-party real estate investing strategies involve multiple investors pooling their resources together to invest in real estate properties managed by a third-party entity. In this model, investors don’t directly own or manage the properties themselves. Instead, they contribute capital to a collective investment vehicle.

Third-party real estate investing gives investors the opportunity to diversify their investment portfolios and gain exposure to real estate without the responsibilities of property management.

Even though these investments are generally less involved, investors still need to perform their due diligence and select a reputable third-party entity that aligns with their investment goals and risk tolerance.

Once chosen, investors contribute funds to the entity, which then uses the pooled capital to acquire and manage various real estate assets. Profits generated from rental income, property appreciation, or other forms of real estate investment returns are distributed among investors according to their share of the property.

Third-party real estate investing is a good way for investors to access real estate markets that may otherwise be out of reach due to high entry barriers. It offers investors the potential for passive income and portfolio diversification without the need for direct involvement in property operations.

Investors should keep in mind that while third-party real estate investing is a viable and attractive strategy, it is different from your traditional strategies. Remember that under this format, you have less control of the assets as they are bought and sold. [2]

If you are okay with a more passive investment in real estate, then this could be a good fit for you.

Real Estate Investment Trusts (REITs)

Real estate investment trusts (REITs) are companies that own, operate, or finance income-generating real estate across a range of property sectors. [3]

REITs provide a way for investors to invest in real estate without directly owning, managing, or financing properties themselves. These companies typically invest in various types of real estate assets such as residential apartments, office buildings, shopping malls, hotels, and industrial facilities. [3]

Unlike other real estate companies, a REIT does not develop real estate properties to resell them. REITs purchase and develop properties to operate them as part of its investment portfolio. [3]

One of the most interesting features of REITs is that they have to distribute at least 90% of their taxable income to shareholders in the form of dividends. For investors seeking income, this is an attractive option. This requirement gives REITs favorable tax treatment, similar to mutual funds.

Investors can buy shares of publicly-traded REITs on stock exchanges just like they would buy shares of any other publicly-traded company. It’s worth noting that there are non-traded and private REITs available to investors, though they lack the liquidity of publicly traded REITs.

REITs generate income primarily through rental income from properties they own, as well as capital appreciation of the properties they hold. The performance of a REIT is therefore closely tied to the performance of the real estate assets it owns. [3]

It’s important to note that like any other investment, REITs carry risks. They are affected by fluctuations in property values, interest rates, and market conditions. Investors should carefully consider these factors before investing in REITs.

Real Estate Crowdfunding

Real estate crowdfunding is a method of financing real estate projects through a collective effort of multiple investors. This is typically facilitated by an online platform, sometimes via social media. Crowdfunding democratizes real estate investment by allowing people to invest smaller amounts of money into larger real estate projects that they might not be able to afford individually. [4]

Here’s how it generally works: A real estate developer or sponsor lists a property or project on a crowdfunding platform, detailing its investment potential, expected returns, and other relevant information. Investors can browse through these listings and choose the projects they want to invest in.

They can invest different amounts—sometimes as little as a few hundred or thousand dollars—and become partial owners of the property or project. Once the funding goal is reached, the project moves forward, and investors typically receive returns in the form of rental income, interest payments, or a share of the profits when the property is sold. [4]

Crowdfunding platforms often handle all administrative tasks, including legal paperwork, investor communication, and distribution of returns, in exchange for a fee or a percentage of the investment.

Real estate crowdfunding offers investors a more accessible way to diversify their portfolios and participate in the lucrative real estate market without the high barriers to entry associated with traditional real estate investment. [4]

Real Estate Mutual Funds

Similarly to crowdfunding, mutual funds are investment vehicles that pool money from multiple investors. Mutual funds invest primarily in real estate-related assets such as residential or commercial properties. Mutual funds can also invest in REITs, real estate operating companies (REOCs), and mortgage-backed securities. [5]

These funds are managed by professional portfolio managers who make decisions on behalf of investors regarding the fund strategy, including asset allocation. [5]

When investors buy shares of a real estate mutual fund, they are essentially buying a portion of the fund’s underlying real estate assets. The fund then uses the collective capital to invest in various real estate opportunities, with the aim of generating returns.

Unlike traditional real estate investment opportunities, mutual funds provide liquidity, allowing investors to buy and sell shares on a daily basis at the fund’s current net asset value (NAV). This makes them more accessible compared to direct real estate investments. [5]

Pros and Cons of Third-Party Real Estate Investing

Third-party real estate investing offers a variety of advantages. One key benefit is diversification. By investing in a pool of real estate assets managed by professionals, investors can spread their risk across different properties and locations. This diversification can improve portfolio stability and help mitigate the impact of economic downturns. Real estate in general has low correlation with other assets like stocks and bonds, which is why they make the perfect addition to any investment portfolio.

Third-party real estate investments also provide access to assets that would otherwise be out of reach for individual investors due to high entry costs. This allows investors to participate in a wider range of real estate sectors, including commercial, residential, and industrial properties. On top of that, they don’t even have to worry about property management.

Just remember that even third-party real estate investing has its drawbacks.

Because they are controlled by a third-party, investors need to be comfortable with taking the backseat for these investments. Some investors do not like this lack of control. However, if you want to explore passive investment opportunities, this is the right way to go.

Finally, some third-party real estate investments are less liquid than other asset classes, making it challenging to quickly access capital when needed. That said, these third-party investments still offer more liquidity compared to direct property ownership.

Is Third-Party Real Estate Investing Right for You?

Whether third-party real estate investing is suitable for you depends on your investment goals, risk tolerance, and preferences.

If you’re looking for a hands-off approach to real estate investing with diversification and liquidity benefits, third-party options like REITs, crowdfunding platforms, or mutual funds may be worth considering.

However, if you prefer direct control over your real estate investments and are willing to take on more active management responsibilities, owning properties outright might be a better fit.

Before diving into third-party real estate investing, you need to conduct thorough research. Consider consulting with a financial advisor to ensure it aligns with your investment strategy.

The Best Real Estate Investment for Accredited Investors: Multifamily Syndication

With careful consideration and due diligence, third-party real estate investing can be a valuable addition to your investment portfolio.

For accredited investors, the best third-party real estate investing strategy is definitely multifamily syndication. It has all the benefits mentioned above: being able to pool resources with multiple investors, earning a share of the rental income, and not having to worry about property management.

The only difference is that real estate syndication deals typically involve larger real estate properties and that these deals are exclusive to accredited investors.

Real estate syndication can actually be done with any type of real estate. But because of the strong and consistent cash flow of large multifamily properties, multifamily syndication is the most popular version. Like other third-party real estate investments, multifamily syndication can make larger assets more accessible to lone investors. [6]

Instead of spending millions trying to purchase an apartment community or a condominium all on your own—and bearing all the risks that come with it—you can invest with multiple real estate investors and only have to worry about your share of the capital.

A syndication deal is arranged by a syndicator, also known as a sponsor, who serves as the general partner (GP) in the deal. They are the ones who will take on most of the responsibilities in the syndication, including locating the investment property, conducting due diligence, crafting a business plan, and finding accredited investors to participate. [6]

On the other hand, investors are much less involved in the process. They serve as limited partners (LPs), providing most of the capital needed to acquire the real estate property in exchange for a share of the monthly cash flow. The profits may be distributed on a monthly or quarterly basis.

Remember that every deal is different. Depending on the deal structure, investors may also earn a share of the equity upon resale.

Beyond providing the capital and paying certain fees, investors have no further responsibilities in the syndication deal. They can just sit back, relax, and enjoy the fruits of their investment while the syndicator does all the work for them. Because you don’t have to worry about the responsibilities of a landlord, you can consider this a true passive investment in real estate. [6]

Unlike traditional real estate investments, syndication deals do not require a significant time commitment. However, you still need to do your research and conduct your due diligence before participating in a syndication deal.

These deals are typically exclusive to accredited investors because they have the financial sophistication and investing knowledge needed to assess these syndications properly. Accredited investors also have the cash flow and net worth to protect themselves in case these bigger investments do not work out.

Remember that no investment is without risk. This also applies to multifamily syndication deals. For example, syndication deals tend to require a significant amount of capital upfront. Funds are also locked up throughout the duration of the deal, so investors need to be comfortable with illiquidity. This is why investors still need to conduct their due diligence and work with a syndicator they trust.

Work With BAM Capital for the Best Multifamily Real Estate Syndication Deals

If you are an accredited investor and you want to add multifamily real estate to your investment portfolio, you should consider real estate syndication. Multifamily syndication in particular is the best way to access these larger properties without having to spend a fortune or deal with multiple tenants.

Work with a trustworthy syndicator—preferably one with a track record for excellence. Work with BAM Capital.

This Indianapolis-based syndicator is widely considered a leader in its industry, and for good reason. It is a vertically-integrated company, meaning they can handle every step of the syndication process, from acquiring high quality multifamily properties to renovating and managing them.

BAM Capital is trusted by accredited investors because of their award-winning investment strategy that creates forced appreciation while mitigating investor risk. They prioritize Class A, A-, and B++ properties with proven upside potential and in-place cash flow. This is why BAM Capital now has over $700 million AUM and 5,000+ units. [7]

No investment is without risk. Make sure to consult your investment advisor or speak to a BAM Capital investment team member before making any financial decisions.

For accredited investors who want to enjoy the passive income and all the other benefits of being in a multifamily syndication, schedule a call with BAM Capital and invest today.

 

Sources:

[1]: https://www.investopedia.com/terms/i/investmentrealestate.asp

[2]: https://www.crowdstreet.com/resources/investment-fundamentals/direct-versus-indirect-investing

[3]: https://www.investor.gov/introduction-investing/investing-basics/investment-products/real-estate-investment-trusts-reits

[4]: https://www.investopedia.com/ask/answers/100214/what-real-estate-crowdfunding.asp

[5]: https://www.investopedia.com/articles/investing/040315/reits-versus-real-estate-mutual-funds.asp

[6]: https://multifamilyrefinance.com/apartment-investing-blog/multifamily-syndication#important

[7]: https://capital.thebamcompanies.com/