Real Estate Investing Guide

Why real estate investing?

With its ability to earn consistent income, track record of long-term appreciation, and capacity to diversify an investment portfolio, real estate is used by many smart investors to build wealth. In fact, those who diversify a portion of their portfolio in real estate investments have historically outperformed those who haven’t.1

What are the benefits of investing in real estate?

Real estate features a unique combination of short-term and long-term earning potential as well as diversification power not found in other asset classes.

Consistent Cash Flow

For many investors, the ability to create consistent cash flow is one of the most attractive aspects of real estate investing. Some examples include equity ownership in apartment buildings that earn income through rental payments or loans that earn income through interest payments. While smaller equity investments, such as homes, can be bought directly, other investment vehicles, such as funds, give investors of all sizes access to larger income-producing assets.

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Long-Term Gain Potential

Equity ownership offers unique potential for generating both cash flow and long-term appreciation. Both residential and commercial real estate have track records of long-term appreciation, which may match with a long-term investor’s portfolio.

The market value of residential real estate in the US increased by 36% over the ten-year span between 2008 and 2018, and by 173% over the 20-year span between 1998 and 2018.2, 3 Commercial real estate in the US also increased by 88% between 2008 and 2018 and by 159% between 1998 and 2018.4, 5

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Diversification

As an asset class with low correlation with the stock market, private real estate offers meaningful diversification. By diversifying an investment portfolio among and across an uncorrelated asset class, such as private real estate, an investor reduces exposure to unnecessary risk of loss, which helps to create a more stable and profitable portfolio.6

20% Rule: Higher return potential at lower levels of volatility

20% Rule: Higher return potential at lower levels of volatility

**Hypothetical portfolios represented by S&P 500 (equity), Barclays Capital US Aggregate Bond (fixed income)
*Hypothetical portfolios represented by S&P 500 (equity), Barclays Capital US Aggregate Bond (fixed income), and an equal weighted blend of alternatives comprised of HFRI Fund Weighted Composite (hedge funds).
Barclays CTA (managed futures), and Cambridge U.S. Private Equity (private equity). Past performance is not a guarantee of future performance.

Source: The Role of Alternative Investments in a Diversified Investment Portfolio by Baird Private Wealth Management

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What does real estate offer that stocks and bonds don’t?

Real estate investments typically complement portfolios heavily allocated to stocks and bonds, because their distinct characteristics can bring advantages not found in the stock market.

More consistency, less volatility

Private market real estate has little correlation with stock market performance because they’re traded in separate markets. This difference, plus less efficient dynamics of the private market and far fewer large daily changes in values, has made its performance far less volatile and more stable than the stock market.

Trends in real returns on equity and housing

In comparison, the number of publicly traded stocks in the US is shrinking and correlation is growing leading to broader volatility.7 Between 1950 and 1999, there were 81 daily movements of 3% or more in the S&P 500.8 Between 2000 and 2018, there were 120 daily movements of 3% or more.9

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Inflation Hedging

As a hard asset, real estate is one of the few assets that can hedge inflation. Because land is naturally limited in supply, it holds intrinsic value. As land becomes scarcer, especially in high-demand areas, its value appreciates. Residential land values in the US have increased by 31% over the ten-year span between 2008 and 2018, and by 169% over the 20-year span between 1998 and 2018.10, 11 Real estate is a unique hard asset because rising demand can not only increase its value, but also its rental price potential.

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How do real estate investments earn money?

Real estate can earn money over the short term and long term through income as well as appreciation.

Real estate can earn money over the short term and long term through income as well as appreciation.

Income

Debt investments, such as a real estate loan, can earn interest typically at a fixed rate of return. Loans are often less risky than equity investments, which make them attractive for those seeking income.

Equity investments can earn income through rental payments. As a long-term investment, real estate investors with equity ownership can earn significant income over time depending on market demand and occupancy.

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Appreciation

While an investment property collects income from paying tenants, the property itself can gain value as well. When the property is sold, it may earn returns for equity investors in a lump sum payment — in addition to any of the income previously earned over the course of the investment’s lifetime.

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What are the tax advantages of real estate investments?

Real estate investments can offer useful tax advantages, but like most investments, tax consequences depend on several factors, including the investment vehicle.

Taxation amounts and timing for each investor are impacted by several factors, including the amount and type of return earned, investment duration, investment vehicle, and other factors. For that reason, it’s important to consult your tax advisor concerning taxes for your specific investments.

On a basic level, any income and capital gains earned from appreciation will likely be taxed at some point. For example, as of 2018, income earned and distributed by REITs and real estate mutual funds can qualify for up to a 20% tax deduction. The pass-through structure of these investment vehicles allows their investors to claim this deduction on qualifying business income under the Tax Cuts and Jobs Acts.

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How long do real estate investments last?

Real estate is generally a long-term investment with the highest earning potential available typically over the course of several years.

Real estate is usually an illiquid investment, especially in the private market. This characteristic means that properties are slow to be sold, but it can also mitigate the volatility found in assets with higher liquidity, like publicly traded stocks and bonds.

The holding period or time horizon for real estate is generally several years. Institutional investors hold commercial real estate an average of 7.6 years, while direct investors who own residential investment properties may hold them even longer.12 At Fundrise, we advise investors to expect a holding period of at least five years.

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What are the options to invest in real estate?

Investment options break down into two categories: active (hands-on) and passive (hands-off). Each approach has distinct advantages and disadvantages.

Active

Active real estate is the direct ownership of an asset. This approach gives investors more control, but also greater responsibility and exposure to risk. Active investments, like rental properties, wholesaling, and house-flipping, are often high-effort, time-intensive, and require some amount of expertise to be successful.

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Passive

Passive real estate investors provide only the capital and let professionals invest in real estate on their behalf — often through a fund. Passive investors bear less responsibility and generally have greater access to investments of various types and sizes. Options like REITs, mutual funds, and real estate investment platforms are typically low-effort and hands-off, without requiring expertise.

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Considering investing?

Depending on which way you choose to invest in real estate, you’ll need varying amounts of time, knowledge, and capital. Fundrise offers a simple, low-cost way to invest in real estate whether you’re investing $1,000 or $100,000.

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