Goldilocks And The Three Bears is not a story about real estate investments. Instead, some people think it’s a sweet innocent story about a young girl who stumbles into a cabin in the woods. There she finds refuge, a warm meal, and a nice place to get some rest.
Well those people are wrong.
Blinded by her pigtails, dimples, and innocent looking face, they fail to see the more ominous truth behind this little girl’s story.
In reality, Goldilocks is nothing more than a hooligan. The book reads as a true crime story with the list of offenses including breaking and entering, theft, and destruction of property.
And I doubt these were her first offenses. How can this possibly be considered a children’s book?
Nevertheless, Goldilocks does introduce us to the concept of finding something that is just right. She won’t accept too hot or too cold. She loathes too hard and too soft. No, she’s on a relentless quest to find the ever elusive “just right.”
Maybe she’s burdened with obsessive-compulsive disorder too. But that’s beside the point.
While I don’t condone her criminal misconduct, I do admire her due diligence. Her unwillingness to settle for something less than ideal reminds me of my own story looking for passive real estate investments.
Similar to Goldilocks, passive real estate investors have three basic broad categories of investments to choose from.
- Real Estate Investment Trusts (REITs)
- Crowdfunding
- Syndication
Too Cold – Publically Traded Real Estate Investment Trusts (REITs)
Publicly traded REIT’s have a long history of solid returns. So it’s not necessarily a bad investment. However, most people think that an investment in a REIT is an investment in actual, physical property. Unfortunately, that’s not true.
REIT’s are actually paper assets. You’re investing in stock. And just like any other stock, REIT ownership represents a small investment in a company that owns real estate. Thus it’s not direct ownership. Instead, it’s a real estate sector play within the broader stock market.
Since REIT ownership is stock, the tax treatment is the same as other stocks. In other words, one loses the distinct tax advantages that direct ownership of real estate gives them.
In addition to the higher taxed nature of REITs, they also tend to be more closely correlated to the stock market than direct ownership of real estate. So when the stock market declines, REITs tend to decline as well. That makes them a poorer choice for diversification.
Too Hot – Crowdfunding
Crowdfunding was started in 2012 with the passages of the Jumpstart Our Business Startups (JOBS) Act. At the time, the economy wasn’t doing well, so Congress passed the JOBS Act. In essence, the JOBS Act, deregulated the syndicated real estate space.
Prior to the passage of the JOBS Act, real estate syndicators were barred from advertising their investments. They had to grow organically through excellent operations and word of mouth. This process acted much like natural selection in which only the strong survived.
That was good for investors, as failed and marginal syndicators quickly found it difficult to raise money to acquire new properties. They lived and died on the strength of their track record. Unfortunately, the JOBS Act changed all of that.
Lifting the ban on advertisement opened the floodgates to newbie and failed syndicators. No longer was it necessary to have an excellent track record to raise money for new projects. Instead, they could just hire a marketing expert, known as a crowdfunder, to raise the money for them.
Of course it costs money for these crowdfunding middlemen to put up their fancy websites and hypnotize the masses. So they charge syndicators an extra fee for their services. That extra fee impacts the overall return of the property.
The combination of higher expenses, increased risk, and decreased tranparency that crowdfunding has brought to the real estate investing space is bad for investors. These are still very young platforms and yet we’re already seeing cracks in the industry.
Fortunately, some crowdfunding marketing platforms are better than others. And hopefully, the regulatory bodies will continue to crack down on this space. It’s important that investors who choose crowdfunding have the information they need to make sound investment decisions. Nobody wants to see individual crowdfunders fail as it harms investors and stains the industry as a whole.
Just Right – Syndicated Real Estate
Investing in syndicated real estate creates a relationship with you and the company that you’re investing with. It’s not like crowdfunding. There is no third-party middleman muddying the waters.
And since it’s a direct investment in real estate, the investor can participate in depreciation, bonus-depreciation, 1031 exchanges, and all of the other tax benefits that are inherent in real estate.
There’s a long history of positive returns in this space and syndicated apartments have proved their mettle in both good times and bad. They are highly uncorrelated to the stock market, which makes them an excellent diversification play as well.
If you’re like me, and find this space to be “just right” for your investment portfolio then it’s important to do your due diligence on the syndicator before making an investment.
You should know things like:
- How long have they been in business?
- What markets do they invest in?
- How many transactions have they done?
- What is their track record?
- What is their investment philosophy?
- Do they provide a preferred return?
- What are their historic returns?
- What are their fees?
- Do they utilize 1031 exchanges?
If they’re an experienced syndicator with a favorable track record and their investment philosophy matches your own, then you just may have found your Goldilocks real estate investment.
Want to learn more?
Download your free copy of Evidence Based Investing and learn why it’s a preferred asset class.
