Accredited Investors- Real Estate vs Mutual Funds

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Should You Invest In Real Estate or Mutual Funds? What Is The Better Investment For Accredited Investors?

For many investors, one of the biggest challenges is choosing the right investment vehicle that can meet their budget, risk tolerance, and financial goals. Among the numerous options, real estate and mutual funds often stand out as some of the most popular choices. BAM Capital obviously is bullish on real estate investing, particularly multifamily syndication. However, a diversified portfolio is always appreciated. 

Investment options in real estate had not been practical for the average investor before the introduction of real estate investment trusts (REITs). But regardless of the type of investment, there are multiple factors to consider before using your capital on any kind of asset. [1]

Each has its own set of advantages and drawbacks, so the decision will be largely dependent on the investor’s preferences. But in order to make this decision, one must have an understanding of what these investment vehicles are and how they work.

Here we will discuss the advantages and disadvantages of investing in real estate and mutual funds, so that investors can make an informed decision.

Understanding Real Estate Investment

Real estate investing is defined as the purchase, ownership, management, rental, or sale of real estate for profit. It is an appealing option for many investors because it is a tangible asset class, meaning even if they do not rent it out for profit, they can still benefit from the property by using it themselves.

Investing in real estate has long been one of the most reliable ways to build wealth for the long-term. [2]

Real estate offers a variety of opportunities for both individuals and institutional investors. From residential properties like single-family homes and apartments to commercial spaces such as office buildings and shopping centers, real estate investment can provide substantial returns and income streams.

While it has several benefits such as passive income, tax benefits, and the potential for appreciation, successful real estate investing requires a deep understanding of market dynamics and property management. Like any investment, there are pros and cons that investors need to carefully consider. [2]

Pros of Real Estate Investment

Investing in real estate offers numerous advantages, one of which is the potential for consistent and reliable income. Rental properties, for instance, can provide a steady stream of monthly rental payments, offering a dependable source of cash flow. [2]

Multifamily properties such as condominiums and apartment communities are even better when it comes to generating strong and reliable cash flow, thanks to their multiple units. Unlike single family properties, they are less severely impacted by vacancies because the remaining units can still provide rental income even if one or two tenants leave.

This is particularly beneficial in comparison to other investment vehicles, such as stocks, which may be more volatile and less predictable. In addition to this, real estate tends to appreciate over time, meaning that the value of the property increases. This appreciation can provide substantial returns when the property is eventually sold. [2]

Another significant benefit of real estate investing is diversification. A diversified portfolio minimizes risk, especially if the different asset classes have low correlation. Real estate generally has a low correlation to other popular asset classes like stocks and bonds, meaning potential losses are balanced out by better-performing investments.

Real estate can also act as a hedge against inflation, as property values and rental income tend to increase with rising prices. This makes real estate a stable investment option during economic downturns or periods of market volatility.

There are even various tax benefits associated with real estate investing, such as deductions for mortgage interest, property depreciation, and other related expenses. These tax advantages can reduce the overall tax burden on the investor. In the long run, this increases their net returns from the investment. [2]

Cons of Real Estate Investment

While often lucrative, real estate still comes with several noteworthy drawbacks. One major concern is the high initial capital requirement, making it less accessible to average investors without substantial financial resources. [2]

Another downside is that even though it is generally more stable than the stock market, the real estate market can still be affected by fluctuations due to economic conditions, interest rates, and local market dynamics. These factors can affect property values and rental incomes.

Real estate investors should also know that these investments tend to be associated with illiquidity. Selling property can be time-consuming and costly, particularly in a down market. You need to be prepared for the fact that your funds may be locked up for a significant period of time. [2]

Real estate ownership also entails becoming a landlord. This means worrying about ongoing maintenance, management responsibilities, and costs such as property taxes, insurance, and repairs. For those who do not have the time and energy to handle these tasks, real estate investing may require hiring a property management company to do it for you.

Understanding Mutual Fund Investment

Mutual fund investment is a popular strategy that pools money from multiple investors to purchase a diversified portfolio of securities such as stocks, bonds, and other assets. [3]

Managed by professional fund managers, mutual funds offer investors the opportunity to invest in a broad range of securities, which might be challenging to achieve individually due to high costs or lack of expertise. [3]

This collective investment vehicle aims to provide investors with diversification, professional management, and economies of scale. This approach can potentially enhance returns while spreading risk.

By investing in mutual funds, investors can gain access to a wide array of investment opportunities and markets, making it an attractive option for both novice and seasoned investors seeking to grow their wealth over time.

Pros of Mutual Fund Investment

Mutual funds pool money from multiple investors to buy a wide range of securities, such as stocks, bonds, and other assets. This diversification reduces the risk associated with investing in individual securities, as the performance of any single asset has less impact on the overall portfolio. [3]

Another significant advantage of mutual funds is professional management. Mutual funds are managed by experienced portfolio managers and research teams who make informed investment decisions on behalf of the investors. [3]

These professionals analyze market trends, perform rigorous research, and adjust the fund’s holdings to maximize returns and manage risk.

Finally, mutual funds offer liquidity and convenience, as investors can easily buy and sell shares at the fund’s net asset value (NAV) at the end of each trading day. This makes mutual funds a flexible and accessible investment option for individuals looking to build and manage their portfolios efficiently. [3]

Cons of Mutual Fund Investment

Investing in mutual funds is not without its drawbacks. Mutual funds are associated with several fees and expenses, which can erode overall returns. These include management fees, administrative costs, and sometimes sales charges, known as loads. [3]

Mutual funds may also lack flexibility compared to individual stock investments; investors are subject to the fund manager’s decisions and cannot directly control the portfolio’s composition.

Another concern is the risk of underperformance, as not all funds outperform their benchmarks, and some may consistently underperform due to poor management or market conditions. Mutual funds are also subject to market risk, meaning their value can fluctuate with the broader market, potentially leading to losses. [3]

Lastly, tax inefficiencies can arise because mutual funds may trigger capital gains taxes when the fund manager buys or sells securities, affecting the investor’s tax liabilities regardless of whether they have sold their own shares. [3]

Which is Better for You?

Deciding between real estate and mutual funds depends on your personal financial situation, goals, and preferences. Here are a few considerations to help guide your decision:

• Investment Horizon: Real estate may be better for long-term investors who can commit capital for several years, while mutual funds can be suitable for both short and long-term investments.

• Risk Tolerance: If you prefer a tangible asset and are willing to handle potential volatility in property values, real estate could be appealing. If you seek diversification and lower management hassle, mutual funds might be a better choice.

• Liquidity Needs: If you need quick access to your money, mutual funds offer greater liquidity. Real estate investments typically require more time to sell.

• Management Preference: Consider whether you want to manage a physical asset or prefer to leave investment decisions to professional fund managers.

• Tax Considerations: Assess the tax implications of each investment type based on your personal financial situation.

Both real estate and mutual funds have their own unique advantages and challenges. The best choice depends on your financial goals, risk tolerance, and investment horizon.

Some investors find a balance by including both in their portfolio, leveraging the benefits of diversification across asset classes. By carefully considering your individual needs and preferences, you can make an informed decision that aligns with your financial objectives. [1]

The Best Real Estate Investment for Accredited Investors: Multifamily Syndication

If you are an accredited investor who is interested in real estate investing but you wish to avoid some of its downsides, the best option for you is multifamily syndication.

Multifamily syndication avoids real estate’s most common drawbacks such as property management and high barrier to entry. A real estate syndication is an investment strategy that involves multiple investors pooling their financial resources together to acquire a single real estate property. [4]

This means you get to pool your funds together with other accredited investors to buy a real estate property instead of spending millions of dollars on your own.

While real estate syndication deals can be made with any type of real estate, multifamily syndication is the most popular among accredited investors because as we mentioned earlier, these larger properties are known for their strong, predictable cash flow. [4]

Multifamily properties also tend to be more expensive and more difficult to manage, especially for the lone investor. But through syndication, these investment properties become a lot more accessible.

Real estate syndication deals are arranged by a syndicator or sponsor who takes on most of the responsibilities. This includes locating the investment property, performing due diligence, securing the loan, and finding accredited investors who will participate in the deal. As the general partner (GP), they are in charge of creating the business plan and executing it. [4]

As for the investors, they serve as limited partners (LPs) and take on limited responsibilities in the syndication deal. They provide most of the capital needed to acquire the property and pay certain fees to help get the syndication deal running. Beyond that, they no longer have to get involved. Even property management will be handled by the syndicator.

This means multifamily syndication is a true passive investment in real estate. LPs can just sit back, relax, and enjoy their share of the cash flow. Investors earn a percentage of the property’s cash flow, which may be distributed on a monthly or quarterly basis. They may also earn a share of the equity upon resale, but this depends on the deal structure. [4]

Every deal is different, so due diligence is still necessary on the part of the investors. Make sure you carefully assess the private placement memorandum (PPM) or syndication agreement before participating in a syndication deal.

Work With BAM Capital for the Best Multifamily Real Estate Syndication Deals

Despite the benefits of multifamily syndication, most of these deals are exclusive to accredited investors. Accredited investors have the investing knowledge and experience to properly assess these investments. They also have the income and net worth to protect themselves in case a deal does not work out.

This is why the US Securities and Exchange Commission (SEC) allows accredited investors to invest in unregistered securities.

When investing in a multifamily syndication, it is essential to work with a trustworthy syndicator like BAM Capital. Remember that this is a passive investment, so most of the decisions will be made by the syndicator.

BAM Capital is known as a leader in its industry, thanks to their reliable track record for excellence. BAM Capital is an Indianapolis-based syndicator that prioritizes high quality multifamily real estate properties that are Class A, A-, and B++. [5]

They focus on properties with in-place cash flow and proven upside potential. They then use their award-winning investment strategy to create forced appreciation while mitigating investor risk. In fact, BAM Capital now has over $700 million AUM and 5,000+ units. [5]

As a vertically-integrated company, this syndicator can handle every step of the syndication process, from acquiring the properties to renovating and managing them. They can guide you through the entire syndication deal.

No investment is without risk. Make sure to consult your investment advisor or speak to a BAM Capital investment team member before making any financial decisions.

For accredited investors who want to enjoy the passive income and all the other benefits of being in a multifamily syndication, schedule a call with BAM Capital and invest today.

Sources:

[1]: https://www.forbes.com/advisor/in/investing/real-estate-versus-other-investment-options-which-one-fares-better/

[2]: https://www.forbes.com/sites/forbesbusinesscouncil/2023/10/30/exploring-the-pros-and-cons-of-real-estate-investment/?sh=20e276f4258

[3]: https://www.investopedia.com/ask/answers/10/mutual-funds-advantages-disadvantages.asp

[4]: https://multifamilyrefinance.com/apartment-investing-blog/multifamily-syndication#important

[5]: https://capital.thebamcompanies.com/