Passive income stream, capital value appreciation, portfolio diversification, hedge against inflation, wealth preservation – the list goes on. These benefits associated with real estate investing are what makes it such a popular investment choice among investors. Not until recently, the cold hard truth used to be that if you do not have a large amount of capital ready to fire, you are automatically excluded from the club.
So, what has changed?
Thanks to the emergence of online real estate co-investing platforms, the game is quickly evolving in today’s marketplace. Large real estate opportunities that were typically out of reach to average investors, have now become a viable investment option with affordable quantum. By democratising real estate ownership, investors have a wider choice of real estate opportunities with greater risk diversification.
What is real estate co-investment?
Real estate co-investment is the aggregation of capital from several individuals for the purpose of investing into real estate. Each co-investor will own a percentage of the asset, proportionate to his/her capital contribution relative to the overall purchase price of the asset. Through an online medium, the aggregation of investors is now easily achievable and seamlessly transacted.
What exactly are the benefits of real estate co-investing?
Affordable and Flexible Investment Amounts
Real estate co-investing allows individuals to invest at smaller sums from as little as S$25,000. This lowers the barriers to entry for many investors and opens up a brand new world of property investment, sharing the rewards with a wider audience. At smaller investment sums, investors can also adopt the “divide and conquer” strategy and optimise capital allocation to multiple properties in various countries instead of putting all their eggs into one basket, thus providing greater risk diversification.
Diversification and Access
By co-investing with others, investors can now participate in real estate opportunities in different geographical markets, property sectors, investment strategies and capital stack. For example, you can take ownership of an office building in London or a shopping centre in Australia with a fractional investment quantum. In addition, you can also participate in opportunities according to your risk and return appetite. Finding the right platform where opportunities originate across the entire spectrum is key in gaining access to a wide array of opportunities that best fit differing investment objectives.
The Power in Numbers
By coming together in a company structure to invest in overseas real estate, there are tax savings that are not available to individual investors. For example, there are certain jurisdictions with more favourable tax rates where no investing party holds more than 10% interest in an investment or the investment is done through a debt instrument.
Other Important Considerations
Given the passive nature of your investment, it is vital to assess the track record of the team behind it. The management has to possess a solid track record in real estate investments and asset management in the key markets, sectors and across the investment mandates. There is a myriad of issues to grapple with such as tax, local laws, market nuisances, lease structures, etc – these are potential risk factors which the team has demonstrated a strong ability to manage and mitigate. It is equally important that the platform is backed by some real estate veterans who have invested across multiple commercial and residential real estate cycles.
While real estate investments are touted for producing passive income for investors, the work involved are sometimes not as passive as one would imagine. From the maintenance of property, managing of tenants, liaising with stakeholders, to filing of paperwork, these can be difficult to manage without the proper experience. To address the issue, some co-investment platforms do not merely act as an intermediary to match investors with capital seekers (sponsors/developers). In addition, they perform the heavy lifting of fully managing all investments from the start to finish, allowing investors to enjoy passive income with peace of mind.
Ownership and Control
A commonly asked question regarding co-investing is – who owns the investment, and do I have a say in steering the investment? Indeed, it is paramount to gain clarity and comfort on this question before entering into any co-investment transactions – especially when pondering on scenarios where a co-investment platform ceases to exist, or when critical investment decisions need to be reached. Therefore, a clear and legitimate ownership structure must be in place to govern and safeguard the interest of co-investors. From tech-enabled solutions such as tokenization to the conventional means of using SPVs (Special Purpose Vehicles), investors will have to drill down and gain full understanding of their legal ownership into the investment.
With the exception of REITs, real estate investments are inherently illiquid and there are two main reasons. First, a significant portion of real estate returns is usually tied to the property’s operating cash flows. Hence, a short holding period will not allow investors to harvest fruitful returns. Second, transaction costs such as stamp duty, legal fees, title searches and brokerage fees are hard-hitting and removes a sizeable chunk of sale proceeds during divestment. As a result, short investment horizons provide less time for asset value appreciation, which is necessary to cover the hefty transaction costs.
The arrival of co-investment platforms has vastly expanded the investment options for investors. All investors, regardless of budget, can now access a large pool of opportunities that come in various shapes and forms – which means it is important to bear in mind that not all real estate investments are built equal. Choosing the right property to put your money into begins with investing with the right platform.
RealVantage is a co-investment platform that allows our investors to diversify across markets, sectors and investment strategies.
Visit our main site to find out more!