Should you go public or private in your multifamily real estate investing? While each strategy has merit, one is likely a better fit for your real estate investment goals and risk tolerance.
The Power Of Public Markets
Public markets, which include crowdfunding platforms and real estate investment trusts, are profitable vehicles that offer stable returns and minimal risk, though at lower rates of return. You can invest in multifamily housing through the public markets and publicly traded REITs and get similar exposure. Beneficially, some have dividends that pay income in addition to stock appreciation.
The power of the public markets is that you don't need to be accredited; you can participate directly in multifamily investing with smaller contributions and minimal risk.
Accredited investors are those who earn $200,000 annually as an individual, or $300,000 jointly with your spouse, or have assets exceeding $1 million (excluding your primary residence). Check the SEC requirements to determine your accredited status and consult with your financial advisor.
You can diversify more quickly with public market investments by focusing your capital on several asset classes across regions with a significantly lower capital outlay. The public markets are also attractive because of liquidity. You can invest in a multifamily REIT where you have stock appreciation, and if you need to sell to create liquidity, it's a convenient and viable option to do so.
One of the downsides of REITs and public platforms are fees that can range as high as 15%. However, many investors have found crowdfunding and trusts to be accessible, user-friendly ways to invest with smaller amounts of money. For those looking to get started, some crowdfunding sites allow you to break in with as little as $1,000 to $5,000.
Even if you're pursuing a primarily private investment strategy, allocation to public market investments can help maintain a degree of liquidity and provide a safe balance of diversification. Moreover, REITs also tend to show strong returns during cycles when interest rates are rising.
Private Market Potential
For diversification and an optimal mix of assets, a pool of private and public property investments typically comprise private equity funds. If you invest in the private markets, they're usually illiquid assets with longer holds; however, if done right, you trade liquidity for extra-par returns.
A commonly perceived downside of private market investing is the more substantial capital requirements to get started and the extended commitment period. Depending on your income and risk tolerance, this can be either a pro or a con. The longer your capital is pledged, the higher chance you have to achieve the best cash-on-cash returns.
Private investments are often considered more risky than public; however, objective risk is specific to the experience and due diligence applied by fund management. Well-managed funds invest in a conscious mix of core, core-plus and value-add assets at a range of return rates and risk to achieve stability and diversification.
Private investing is an excellent avenue for high-net-worth and institutional investors that need stable and superior returns. To invest with local real estate operators, you need to be an accredited investor. To invest in private multifamily, you generally need to have the ability to contribute a minimum of $250,000 and keep your capital locked up for five to 10 years; however, the long-term investment offers the benefit of compounding returns. Additionally, some private funds allow you to invest through a self-directed retirement account for enhanced flexibility and control over your portfolio.
Finding The Right Fit
Of the different options, there's no “best” way to invest. It all hinges on your goals, portfolio, earnings and where you are in the investment and retirement life cycle. Public and private market assets both have a place in the investor's portfolio for the most stability and diversification.
Questions to ask in preparing your strategy and criteria:
• What is my tolerance for risk?
• How important is growth versus stability?
• How much can I safely invest?
• What rate of return am I seeking?
• Do I qualify as an accredited investor?
• Can I commit to a long-term investment?
The optimal approach depends on your situation and existing portfolio, and it's always ideal to consult your financial advisor for help in answering these questions.
Capture The Gold
Public and private investment both have rightful positions in the real estate markets. Neither is the “better” option, except with respect to the needs and goals of the individual investor. Do your due diligence and take care by working with financial and legal professionals in formulating your multifamily investment strategy.