Types of Real Estate Investments & Their Return %'s
With real estate investing, market conditions, location, and investment strategy can all factor into real estate returns. Learn more about the types of real estate investments and their returns.
Real estate investment opportunities come in several types, each offering different returns potential based on factors like location, market conditions, and the level of risk involved.
If you’re looking to invest in real estate, it is important to have knowledge of the various types of real estate investments as well as what the associated returns are so you are getting the most out of your investment. Read on to learn more about real estate investments and returns on everything from flips to crowdfunding.
Types of Real Estate Investments and Their Returns
There are two categories of real estate investments that each carry various types of investment opportunities.
Public Real Estate Investments
Public real estate investments are generally owned and traded by publicly traded entities such as Real Estate Investment Trusts (REITs) or mutual funds, meaning they are open to the public for investing. These often come with lower minimum investments than what a private real estate investment would accommodate. These investment shares can also be bought or sold on the stock market any time during stock market hours, giving more flexibility to the investor to buy or sell when the comparison on stock market vs. real estate returns make sense for them.
There are various types of public real estate investments:
Real Estate Investment Trusts (or REITs) pool funds from multiple investors to invest in large-scale, income-generating real estate properties. They are publicly traded on stock exchanges and generally yield annual dividends between 3 and 8 percent with a total annual return of 8 to 13 percent according to Nerd Wallet.
Real Estate Mutual Funds pool money from multiple investors to invest in real estate-related assets from the stock market, including stocks of REITs, real estate development companies, and similar property-related investments. The return on the average real estate mutual fund depends on the fund itself as well as the type of real estate it invests in (REIT, companies, commercial real estate, etc.)
Publicly Traded Real Estate Companies are individual companies listed on stock exchanges that focus on various aspects of a real estate business, such as development, property management, or real estate services. This presents an opportunity for increased portfolio diversification, and, while the return can depend on several factors such as property type and location, can generate returns between 10 and 13 percent.
Real Estate Limited Partnerships allow investors to pool their capital and invest in real estate projects that are usually a broader scope and long-term. This type of public real estate investment offers returns between 8 and 12 percent depending on the management and development costs.
Private Real Estate Investments
Private real estate investments are not traded on the stock market and are usually limited to accredited investors or private entities. These investments can offer greater control to the investor, the potential for higher annual returns, and a more customized approach; however, private real estate investments and returns come with higher risk and less liquidity. From individual real estate investments like flipping to real estate crowdfunding, private real estate investing offers a way to invest with a focus on long-term goals rather than the stock market controlling the investment cycle.
There are various types of private real estate investments:
Direct Investment in Real Estate occurs when an investor purchases individual properties or portfolios of real estate directly, either for rental income or capital growth. For example, if an individual runs a flipping business and turns them around for profit via selling or renting, they have a direct investment in real estate. The returns on direct investments are heavily dependent on property type (residential or commercial) and the location but generally fall between 9 and 11 percent annually.
Real Estate Syndication is a partnership where multiple investors pool capital to purchase a large real estate asset (such as an apartment building, office complex, or shopping center). A syndicator (or sponsor) manages the property and operations, while passive investors provide capital and receive a share of the profits. These more commonly involve commercial properties, and returns can range from 15 to 20 percent depending on the property.
Real Estate Joint Ventures involves two or more parties investing in a specific real estate project. One party typically invests to provide the capital while the other serves as the management side. Profits are shared according to the agreed terms, and returns can range anywhere from 6 to 10 percent.
Real Estate Crowdfunding allows individual investors to pool capital with others to invest in real estate projects or properties together. These crowdfunding platforms can provide opportunities to invest in residential or commercial developments, renovations, or income-generating properties, offering a relatively diverse portfolio option for those getting started in real estate investing. Real estate crowdfunding returns generally range from 7 to 15 percent depending on property and location.
Private Real Estate Funds
A private real estate fund is a financial instrument that pools money from investors to buy and manage real estate properties. Similar to mutual funds and exchange-traded funds, private real estate funds are an efficient method of real estate investing, generally yielding an annual return between 7 and 9 percent.
There are three different types of private real estate funds:
Equity funds: Investing in the ownership of properties, such as office buildings, apartments, or retail centers, and seeking capital appreciation and rental income.
Debt funds: Investing in loans secured by real estate and earning interest payments from borrowers.
Development funds: Focusing on funding the construction or redevelopment of properties in high-growth markets.
A general investment partner initiates the private real estate fund and solicits investors to contribute to the fund. This equity is then used to buy and further develop properties, generating passive income from rental income, property appreciation, and other equity initiatives as directed by the investment partner. Because of the weight of relying on multiple investors, private real estate funds are usually only available to accredited investors and involve heavier investment minimums than other types of real estate investments. However, a private real estate fund provides the benefits of a diversified portfolio with exposure to multiple types of properties over time, professional management and experience from a general investment partner, and the ability to target more high-profile real estate opportunities and developments.
Learn More About Private Real Estate Funds with Capstone Capital Partners
With the Capstone growth fund, you can dive into investing in real estate debt and tailor your investments to your specific financial goals. With Capstone, you are exposed to stable returns through real assets and a real estate investment firm where every client is family.
To learn more about our investment opportunities, let’s get in touch!
