Direct vs. Indirect Real Estate Investments Explained
Investors are increasingly turning to real estate as a means to diversify their investment portfolios.
With inflation and market volatility rising throughout 2022 and looking to continue into 2023, real estate is attractive for its stability compared to stocks and as a hedge against inflation. But there are differences in real estate investments that savvy investors should consider before making investment decisions.
This article explains direct vs. indirect real estate investments, including what they are; how they work; and potential risks, returns, fees, and more. You'll also learn how direct real estate investing with Parvis is challenging industry norms to offer investors significant benefits that are unavailable through traditional avenues.
Direct vs. Indirect Real Estate Investments
→ What is Direct Real Estate Investment?
Direct real estate investing involves buying a stake in a specific property. This is done via either a debt or equity investment. With a debt investment, you are taking part in the lending of capital required to develop or purchase a property. While with an equity investment, you are purchasing an ownership stake in the property. You will share in the profits (e.g., dividends), and the value of your ownership stake will increase if the property performs well.
To learn more about equity and debt investing, read The Capital Stack in Real Estate.
Direct real estate investment examples:
- Purchasing a property
- Buying an ownership stake in a commercial property
- Investing in the lending capital required to build a property
The Benefits of Direct Investing
Control over what you invest in: With direct investing, investors can pick exactly what they are investing in. They can select which particular assets to put their capital towards based on criteria that are important to them, including property location, property types, deal structure, and more.
Tax relief and the ability to defer taxes: Situation dependent, direct investors can write off maintenance/management expenses.
Greater opportunity for capital appreciation: Direct investing allows for even greater capital appreciation because you are in the driver's seat. Investing in properties in up-and-coming areas or putting funds towards a renovation to add value can help increase your ROI from a capital appreciation standpoint.
Diversification opportunity: Historically, the value of real estate assets has risen with inflation, and there will always be a demand for real estate, irrespective of what is happening in the stock market. Direct real estate investments are a great option to diversify a stock and bond-heavy portfolio.
The Cons of Direct Investing
Traditionally, direct investment in real estate has some downsides (we'll touch on how Parvis is changing this later in this article).
Large upfront capital: Direct real estate investments require a significant amount of upfront capital that limits the pool of potential investors able to take part. Typical upfront capital requirements for these investments are at least $50,000.
Less liquidity: Liquidity has long been an issue for direct real estate investments. This is due to the large amount of capital required to invest, a limited pool of investors, and a long, outdated selling/purchasing process that involves a lot of intermediaries (brokers, lawyers, bankers, etc.)
Long investment horizon: The time horizon for investors to recoup their initial investment and earn profits on a direct real estate investment can typically be long, and with the liquidity issues, this can lead to your money being tied up for an extended period.
→ What is Indirect Real Estate Investment?
Indirect real estate investing involves buying shares in a fund or stocks/shares in companies that invest in real estate. Most commonly, this is done via REITs or Exchange-Traded Funds (ETFs). Rather than investing in specific properties, you are typically investing in pooled assets with no control over how and where your money is invested.
Indirect Real Estate Investment Examples:
- Publicly traded REITs
- Private REITs
The Benefits of Indirect Investing
Good for passive investors: This is more of a "set it and forget it" model of investing. With indirect investments, none of your time or effort is required to manage the pooled real estate assets in your REIT or ETF.
Less upfront capital required: Indirect investing requires significantly less capital than direct investing options. Prices vary, but you can invest in REITs with under $100 in upfront capital.
Ability to provide good diversification: Just like direct investments, indirect real estate investments offer investors an excellent opportunity to diversify their portfolio with assets other than stocks or bonds. REITs provide an added layer of diversification for investors as they are investing in an often diverse pool of real estate assets.
The Cons of Indirect Investing
Taxed heavily: Unlike its direct counterpart, indirect investments don't offer opportunities for you to write off or defer taxes. You must pay income tax on dividend returns, and capital gains tax also applies.
No control over where the money goes: With indirect real estate investments, you have no control over which specific properties you can invest in. Essentially, you are making a blind investment in pooled real estate offerings, and the only control indirect investors have is which REIT or ETF they choose to invest in.
Less transparency: Indirect investments offer a lack of transparency compared to direct investments. Because you are investing into a blind pool of real estate assets, the following information regarding your investment can be difficult to find:
- Tenant information
- The condition of the real estate assets
- Information about the property manager
- Individual asset performance
High fees and lower returns: The fees associated with indirect real estate investing can be quite high. REITs typically have fees of 15%, which cut into your returns.
The Benefits of Direct Real Estate Investing With Parvis
The Parvis platform offers investors all of the benefits that come with direct real estate investing, and its blockchain-backed secondary market all but eliminates the negatives that have traditionally been associated with it.
Here's what sets Parvis apart from others::
Control and flexibility: Direct deal investing gives our investors the opportunity to flex more control over their real estate opportunities. You can select a specific property by location, property type, capital structure, investment horizon, and more, to align with your investment goals, risk profile, and other important criteria. Our diverse investment strategies allow investors with various risk appetites to find opportunities that are right for them.
Institutional-quality investment opportunities: Parvis works closely with some of the most established developers across North America, giving qualified investors the opportunity to invest in often exclusive, institutional quality real estate investment opportunities.
Lower fees & higher returns: Indirect investment options like REITs have fee structures that can sit as high as 15%, while Parvis typically targets 2-6%. The Parvis platform makes this possible by streamlining the investing process to cut out many of the fee takers, allowing them to pass the savings on to its investors.
Transparency: Transparency is central to our model, a departure from industry norms. Expect new asset updates and milestones like construction progress, occupancy reports, market data trends, and more.
Liquidity via our secondary market: No matter when you invest or what you invest in, we realize that modern investment strategies need flexibility to potentially liquidate. With Parvis's Secondary Market, investors have the potential to sell select assets during one of our trading windows before the end of the term.
Here at Parvis, we are creating the next generation of real estate investing. Our state-of-the-art, blockchain-backed platform provides investors with institutional-level investment opportunities and strategies to meet their needs. This all comes with lower fees, high returns, more transparency, and increased liquidity due to our secondary market.
Sign up today and start building your real estate investment Portfolio with Parvis.