Direct Real Estate Investing

Direct Real Estate Investing

EquityMultiple was founded with a shared vision of making real estate investing simple, accessible, and transparent for accredited investors. But what do we mean by “real estate investing?” Let’s get specific. Self-directed individual investors have had some degree of access to real estate through REITs (real estate investment trusts) since the late 60’s. Homeownership has been a cornerstone of wealth creation for Americans since the early 20th century, when federal programs began facilitating the financing of single-family homes and the urbanization of the country created lucrative single-family housing markets. However, neither REITs nor single-family home ownership is the preferred real estate investment channel of sophisticated institutional investors. 

This article explores how direct, private commercial real estate investing differs from REITs, single-family home investing, and offline syndications. We will also make clear why EquityMultiple pursued this “Direct” approach from day 1, and why direct CRE investment remains a cornerstone of our value to investors. 

How Direct Real Estate Investing Differs from REITs

Publicly traded real estate investment trusts, as the name suggests, are highly liquid. While public REIT distributions are tied to the performance of constituent real estate assets, shares of REITs are traded on public exchanges, and hence REIT valuations can fluctuate with investor sentiment, much like public equities. Consequently, public REIT performance has historically correlated more closely with the stock market than private commercial real estate. 

As such, public REITs do not offer the uncorrelated return potential of private commercial real estate, and thus do not offer the same level of diversification for an investor already substantially allocated to stocks and bonds. In other words, public REITs may offer easy access to real estate, but do not help to reduce cross-asset correlation to the same extent that private-market commercial real estate potentially can.

Transparency

EquityMultiple’s Direct investments offer a degree of transparent lacking in REITs, which generally operate as blind pool funds. Allocation toward REITs may entail allocation to dozens of properties at the sole discretion of the REIT’s management. EquityMultiple’s Direct Approach allows investors to view all details of the property, sponsor (the real estate firm managing the investment), the market, the business plan, and EquityMultiple’s underwriting. For investors who want to take a more active role in evaluating CRE investments, and tailoring their real estate portfolio to their specific goals and risk tolerance, this Direct Approach may offer welcome transparency and control. 

REITs do, however, offer liquidity and “one-to-many” exposure to multiple assets. Both REITs and Direct CRE investments may be appropriate for some investors. For those interested in private, multi-asset investments, EquityMultiple’s Fund Approach may be compelling.

Direct Commercial Real Estate Investing vs. Single-Family Home Investing

Purchasing a single-family home, renting it out at a profit, and watching it appreciate over time. This is the straightforward order of operations many investors think of when considering a foray into real estate investing. While the basic tenets of rental income and appreciation do carry over, single-family home investing differs substantially from multi-tenant commercial real estate investing. 

• Tenancy Risk – Single-family homes typically have a binary occupancy status: they are either rented or they are not. Commercial properties, and in particular multifamily properties with many units, offer the potential for rent roll diversification, which can reduce vacancy risk for operators. 

• Commitment of time and capital – to invest in single-family homes, you need to either manage the “toilets and the tenants” yourself–which can be costly and physically or psychologically draining–or hire a management company (which can be hard to justify unless you acquire a large number of properties in a single market). In either case, your minimum investment into a single property is often 20% in the form of a down payment large enough to avoid personal mortgage insurance. Passive, private commercial investments (of the type EquityMultiple offers) require no upkeep aside from your own diligence, which EquityMultiple streamlines. Investments minimums are as low as $10,000. 

• Sectoral and market diversification – Investing in single-family homes typically means investing close to home. Investing passively in commercial real estate at low minimums can facilitate portfolio diversification by giving you exposure to different markets, different property types, and hence investments supported by varied microeconomic and macroeconomic trends. EquityMultiple also allows you to benefit from the institutional focus of experience commercial real estate firms; you can easily invest alongside a variety of experienced operators. 

The Bottom Line

EquityMultiple’s Direct Approach allows you to invest directly and passively into a wide array of private-market commercial real estate. While publicly traded REITs and single-family investments may be viable for many investors, they do not offer the same combination of passive income potential, transparency, and potential for returns bearing low correlation to the stock market.