2 ways to build wealth through real estate equity investing

Advantage of private-market real estate

The private nature of these investments allows for a more hands-on approach, potentially leading to higher returns due to the active management of the assets. Critically, private-market real estate is illiquid. Read more: How green real estate investing can generate superior returns.

Assets that are exchanged via private markets (usually via auction platforms or facilitated by private brokerages) are subject to market inefficiencies, such as imperfect information and high barriers to entry. Inefficient markets mean opportunities to capture returns in ways that investors can’t via public markets, which are liquid and react quickly to changing conditions.

Direct ownership: Investors in private-market real estate often have a more tangible connection to their investments, as they own a share of the actual properties. This direct ownership can lead to a sense of control over the investment, as decisions about property management, tenant selection, and renovations are made by the asset managers who are directly accountable to the investors. This may be a critical advantage for socially responsible-minded investors.

Potential for higher returns: The active management and value-add strategies employed can lead to significant appreciation and higher overall returns. For example, a private real estate fund might acquire an underperforming commercial property, implement improvements to increase its value, and subsequently sell it at a profit or refinance it to return capital to investors. According to the National Council of Real Estate Investment Fiduciaries (NCREIF), private market real estate has delivered an average annual return of approximately 8.4% over the past 20 years, outperforming many other investment classes.

Tax benefits: Private real estate investments can offer tax advantages, such as depreciation and the potential for 1031 exchanges, which can defer capital gains taxes. These benefits can significantly enhance the after-tax return on investment, making private real estate a potentially more tax-efficient option compared to other investment types.

Lower volatility: Private-market real estate is generally less susceptible to market fluctuations, providing a more stable investment option. Since these assets are not traded on public markets, their values are not subject to the daily price swings seen in publicly traded securities, which can be driven by factors unrelated to the underlying property’s performance.

Enhancing portfolio diversification

Private-market real estate (an “alternative asset”) can also play a crucial role in portfolio diversification. By investing in physical properties across various geographic locations and sectors, such as residential, commercial, industrial, and retail, investors can spread risk and potentially reduce the correlation with traditional financial markets.

For instance, during the 2008 financial crisis, while public equities experienced significant volatility, many private real estate investments provided a cushion due to their stable cash flows and intrinsic value.

Public REITs behave differently from private-market real estate in one key respect: they are traded as securities. So, while a public REIT will offer some diversification from stocks and bonds, it may be subject to some of the same sentiment-driven swings as other publicly traded assets (namely stocks).

Because private real estate equity is untraded, it may offer more “de-correlation” from stock market returns. Many analyses of past data prove this out. A recent study from PGIM, looking at the years 2000-2022, shows that private real estate equity was significantly negatively correlated versus performance of large cap stocks over this period. Public REITs, meanwhile, bore a 54% correlation.

Advantages of REITs

Liquidity: Shares of publicly traded REITs can be bought and sold on the stock market, offering investors the flexibility to quickly adjust their positions. This liquidity is particularly appealing for investors who may need to access their capital on short notice or who prefer the ability to easily rebalance their portfolios.

Diversification: REITs often hold a diverse array of properties, providing investors with exposure to various sectors within the real estate market. For instance, a single REIT might invest in a mix of office buildings, shopping centers, and apartment complexes across different geographic regions, spreading risk and reducing the impact of any single property’s underperformance.

Dividend income: REITs are known for providing consistent dividend payouts, which can be an attractive feature for income-focused investors. The dividend yields of REITs are often higher than those of other equities, making them a popular choice for those seeking regular income streams. In fact, historical data from the FTSE Nareit Equity REITs Index shows that REITs have consistently offered dividend yields of 4% or higher, which is particularly compelling in low-interest-rate environments.

Control and transparency

REITs are highly accessible and offer built-in diversification. The downside: a lack of transparency versus more direct ownership of real estate. This may be significant for investors who want to understand the impact of their investment.

By investing in private-market real estate via platform like EquityMultiple, for example, an investor can get to know the real estate firm behind the investment (the “sponsor”), the neighborhood and the potential impact on the community, tenants and the local built environment.

Some public REITs may also offer the opportunity to confront the housing affordability crisis. However, investors in such REITs would still have relatively little visibility into day-to-day operations and the specific properties that make up the fund.