When it comes to investing in real estate, the choices are as varied as the properties themselves. How you structure your ownership can significantly impact your investment experience and bottom line. Here’s an expert rundown of five standout real estate ownership structures, revealing their unique advantages and drawbacks.
Key Ownership Structures
- Sole Ownership
- Real Estate Investment Trusts (REITs)
- Tenants In Common (TIC) Investments
- Delaware Statutory Trusts (DSTs)
- Equity Funds
Remember, these structures don’t dictate the asset class—be it commercial, residential, or mixed-use. You can invest in similar assets via any of these structures.
Sole Ownership: The Lone Ranger’s Domain
- Full Control: Sole ownership gives you the reins—over acquisition, financing, lease terms, and more.
- 1031 Exchange Eligibility: This structure allows you to defer taxes through a 1031 exchange.
- Full Responsibility: With great power comes great liability; you’ll be “on the hook” for everything.
- Limited Diversification: Recommended mostly for investors with a net worth exceeding $25 million, as diversification is hard otherwise.
Sole ownership is a feast for control freaks. It’s like being the captain of your own ship, steering through both calm and choppy waters. But, of course, the onus of any misadventure falls squarely on you.
REITs: Diversification Meets Passive Income
- Diverse Portfolio: REITs invest in a variety of assets.
- Low Barrier to Entry: With minimum investments as low as $1,000, it’s accessible for many investors.
- Eligible for 1031: REITs are eligible for 1031 exchanges via the UPREIT investment route.
- Limited Control: As a passive investment, you won’t be part of day-to-day decision-making.
- Liquidity Constraints: Generally, you’ll have to wait for a REIT to liquidate, which might take around five years.
REITs are the “Apple stocks” of real estate. They’re everywhere, they’re popular, and they’re reliable for stable returns. They’re an ideal starting point for rookies or those who favor a hands-off investment approach.
Tenant-in-Common (TIC): Shared Ownership, Shared Benefits
- Shared Control: TIC offers some level of management control.
- 1031 Exchange Eligibility: Like Sole Ownership, TICs can opt for 1031 exchanges, providing significant tax benefits.
- Complex Decision-making: Major decisions require proportional voting based on equity, which can be cumbersome.
- Illiquidity: TIC real estate lacks a secondary market, making it relatively illiquid.
TICs are like a community garden. Each investor owns a patch but shares responsibility for the garden’s overall upkeep. It’s communal, but it can become a committee nightmare if things go awry.
Delaware Statutory Trusts (DSTs): 1031-Friendly and Passive
- Passive Ownership: DSTs offer no voting rights, making it a hands-off investment.
- High Investor Cap: Allows up to 499 investors, offering low minimum investment options for diversification.
- Eligible for 1031: DSTs are an excellent option for 1031 exchange replacement property.
- Limited Flexibility: Inability to change leases or refinance limits the potential growth of the investment.
DSTs are for those who enjoy the ride but don’t want to hold the wheel. It’s like being a passenger in a well-driven luxury car; you’ll get to the destination, but don’t get to dictate the route.
Equity Funds: High Risk, High Reward
- High Return Potential: Often seeks higher-risk assets for higher returns.
- Non-Correlated Assets: Provides a layer of financial security during market downturns.
- No 1031 Eligibility: These structures are not compatible with 1031 exchanges.
- Limited Control: Investors are not in the driver’s seat when it comes to management.
Equity Funds are the venture capitalists of the real estate world. They aim for the moon but remember, the higher the climb, the harder the fall.
The Next Move is Yours
Whether you’re a seasoned investor or just getting started, choosing the right structure can make or break your real estate investment experience. Examine your financial goals, risk tolerance, and desired involvement level, and pick the one that resonates with you.
Ready to take the plunge? Reach out to one of our trusted investment advisors specializing in real estate investments to tailor a strategy that’s right for you.
Your future in real estate investment is just one smart decision away. Make it count.
- Can I Use A DST Investment To Defer Taxes?
- What Are The Differences Between Delaware Statutory Trust (DST) And Real Estate Investment Trust (REIT) Investments?
- How Do REITs Compare To Other Types Of Real Estate Investments?
- What Are The Differences Between Tenants In Common (TIC) And Real Estate Investment Trust (REIT) Investments?
- What Are The Differences Between Delaware Statutory Trust (DST) And Tenants In Common (TIC) Investments