Real estate investing provides a variety of investment options, each offering distinct advantages and drawbacks. The most common forms of real estate investment include: 

  • Direct purchase of single family or small multifamily properties  
  • Syndications  
  • Publicly traded REITs  
  • Real Estate Funds  

Let’s take a quick look at some of the pros and cons of each real estate investment vehicle:  

Direct Purchase

Pros

  • 100% control over the investment
  • Tax benefits
  • Retain all profits

Cons

  • Illiquid
  • Time intensive
  • Lack of asset diversification
  • Lack of tenant diversification
  • Generally required to personally guarantee debt
  • Requires significant amount of capital to build a large portfolio

Syndications 

Pros

  • Passive investment 
  • Limited liability 
  •  Allows for larger real estate projects than direct ownership 
  •  Tax benefits  
  •  Lower minimum investment  

Cons

  • Illiquid 
  • No control 
  • Typically requires all investors to be accredited   
  • No diversification of assets 

Publicly traded REITs  

Pros

  • Liquid  
  • Low minimum investment 
  • Can pay out regular dividends creating passive income while participating in potential appreciation of stock value 

Cons

  • Highly correlated to the stock market  
  • Higher volatility and swings in market value  
  • Tax treatment (income and dividends are generally classified as ordinary income)  
  • Historically have provided lower rates of return compared to private real estate investing [1] 

Real Estate Funds 

Pros

  • Asset and tenant diversification 
  • Passive investment  
  • Limited liability  
  • Lower minimum investment  
  • Shared team expertise 
  • Tax benefits  
  • Strong GP alignment  
  • Preferred returns 

Cons

  • Illiquid  
  • No control  
  • Typically requires all investors to be accredited 

While each of these real estate investment vehicles could be evaluated further, for the sake of brevity, I will focus on the benefits of closed-end private equity real estate funds. After two decades of personal experience in real estate, investing through the real estate fund structure has become my preferred investment vehicle for the following advantages: 

1. Diversification  

Real estate funds provide immediate diversification across a multitude of factors including exposure to multiple assets, asset types, classes, and geography, significantly mitigating risk. In fact, a study done by Ashcroft Capital has shown that investing in real estate funds carries 2.7 times less risk compared to investing directly or through a syndication. [2]

2. Passive Investment  

Fund investing allows limited partners to participate in large real estate investments passively. All acquisitions, development, sourcing of debt, asset management, property management, dispositions, etc., are the sole responsibility of the general partners. With no other time required other than their personal due diligence, funding capital calls, and providing a K1 to their tax professional, fund investing requires a very minimal time commitment from investors.  

3. Limited Liability  

Unlike direct real estate investing, where the investor is often required to personally guarantee the debt, funds never require personal guarantees from investors which significantly reduces liability risks for investors. Aside from capital invested, limited partners carry no additional risk of loss.

4. Lower Investment Minimums  

Real estate Funds generally carry lower investment minimums than direct real estate investing, helping remove the “barrier of interest” and allowing access to assets that otherwise may be too large. Additionally, funds often provide a capital call schedule allowing investors to contribute capital over time versus fully funding their commitment upfront (as is usual for direct purchases and syndications). 

 5. Shared Team Expertise 

Fund investing allows investors to align themselves with seasoned investment managers with experienced teams who make it their full-time job to construct and manage the funds portfolio. This history of experience becomes vital in times of economic uncertainty when volatile markets create unexpected roadblocks difficult for individual investors to overcome while experienced teams have more resources, partner relationships, and the knowledge to anticipate and prepare for these challenges.   

6. Same Tax Benefits as Direct Ownership  

Real estate funds can pass the tax benefits through to the limited partners in the same way as directly owned properties. (While not standard practice, Axia Partners passes 100% of the tax benefits through to our limited partners.)

7. Greater GP Alignment   

General partners participate in profits only after all limited partners have not only received 100% of their initial capital back but also achieved the set preferred return. This structure creates a strong alignment between the general partners and the limited partners, with the sponsor only benefiting after the investors have already won. This approach ensures that fund managers must be highly selective when choosing assets to include in the portfolio.  

At Axia Partners we urge all investors to evaluate their investment decisions from the context of their overall investment portfolio and make decisions that align with their personal investment objectives and goals. While this is in no way financial advice, I’ll wrap up here with my opinion in summary:

If you have a small amount of investable capital, need immediate access to your capital, and are OK with historically lower returns, consider REITs.

If you are willing to take on a more active role with your time, have enough capital for a large down payment, and are comfortable guaranteeing the debt, consider direct ownership.

If you want to be completely passive, are an accredited investor, and prefer to know the exact asset you’re investing in, consider syndications.

If you want to be completely passive, are an accredited investor, prefer diversification through ownership in multiple assets, and prioritize reducing risk of loss, consider investing in funds.

[1] CoStar Advisory Services: YTD Change: Commercial Real Estate, S&P 500, and REITs

[2] Ashcroft Capital’s simulated model of the rewards of diversification by investing in a fund versus a single property ran 100,000 based on their historical returns of their syndications versus seven properties pooled together. Under these parameters, the results show that a single property investment has a standard deviation that is 2.7 times greater than investing in a fund.