In the same way that stock market investors can decide to invest in an individual stock or a fund comprised of multiple stocks, real estate investors have the option to invest in an entire portfolio of properties or in individual properties.
You can choose to buy shares of a whole fund, which includes multiple properties, or you can hand-pick each of your investment properties, deal-by-deal.
As with any of the popular real estate investing strategies, there is no right or wrong way to invest in real estate. It’s just a matter of deciding which strategy works best for you. And to help you make the decision between whole fund and deal-by-deal investing, the experts at Gatsby Investment have created this helpful guide.
Here’s everything you need to know about whole fund vs deal-by-deal investing.
Whole Fund Investing
Whole fund investing, also called portfolio investing, is when investors purchase shares in a company that owns a portfolio of income properties.
The most common example of fund investing in real estate is through Real Estate Investment Trusts (REITs). REITs are companies that own and operate income-producing real estate. The rental income from the portfolio of properties is distributed to investors in the form of dividends. Investors can accept these dividends as passive income, or they can reinvest their dividends to buy more shares of the REIT.
The key benefits of whole fund investing are automatic diversification and higher liquidity. Let’s take a look at how whole fund investing provides each of these advantages.
Automatic Diversification
Automatic diversification is the primary reason fund investors give for choosing a fund over an individual property. Since a fund includes several properties, the risk of any one property underperforming is mitigated.
For example, say you invest in a fund that contains 50 properties, one of which suffers from chronic high vacancy rates. You’re unlikely to feel any pinch from that property because you have 49 other assets to offset the one that’s struggling.
Potentially Higher Liquidity
Funds, like REITs, are among some of the most liquid real estate investment options available. When you invest in a fund, you can generally cash out by selling your shares fairly quickly. This is very different from traditional real estate investments, which usually require several weeks to find a buyer, then a 30-60-day escrow period, before you can collect your proceeds.
Cons of Whole Fund Investing
There are several potential downsides of investing in real estate funds to consider as well.
Lack of Control
With fund investing, you have no control over which properties are included in the portfolio. You also have no control over acquisitions or disposals.
Potentially Reduced Transparency
In funds that contain a large number of assets, it’s more difficult to gauge the performance of any one asset. This makes it easier to miss red flags that would be evident when investing in an individual deal.
A Poor Performer Could Drag Down Your ROI
In a smaller portfolio, a single poorly-performing property could make a noticeable impact on your returns.
No Ownership in the Underlying Real Estate
With whole fund investing, you own a share in the fund, but you don’t actually have any ownership stake in the real estate owned by the fund.
Deal-by-Deal Investing
Deal-by-deal investing is when you choose the individual properties that will make up your personal real estate investment portfolio.
In traditional real estate investing, deal-by-deal investing typically meant purchasing a property on your own, then using the cash flow from that property for the down payment on a new acquisition. Investors would slowly build a portfolio over decades. The big downside to this old model is that it can be difficult to get on the property ladder (particularly in desirable high-value markets like Southern California). And then growth is slow as you wait to accumulate enough to fund your next acquisitions.
But new investment methods have created ways for investors to start investing in real estate with lower investment amounts and grow a portfolio more quickly. Take real estate crowdfunding, for example. Rather than funding an entire deal themselves, investors can pool their funds with other investors to substantially reduce the initial investment amount for a real estate project. Then, with low investment minimums for each project, it’s easier for investors to spread their investment capital across multiple projects to create a portfolio of hand-selected assets.
Whether you decide to go the traditional investment route or partner with other investors to bring down the upfront investment amounts, you should consider the pros and cons of deal-by-deal investing before jumping in.
Pros of Deal-by-Deal Investing
Deal-by-deal investing comes with three key benefits to consider: more control, greater transparency, and potential ownership rights in the underlying real estate. Let’s take a closer look at each benefit.
More Control
Investing in individual properties gives you the power to choose each asset in your portfolio. Your level of control will vary based on your investment strategy.
If you choose the traditional method of investing in a rental property on your own, you have complete control (within local laws and zoning ordinances of course). You decide if you want to renovate to increase the property value or rent the property as-is. You can choose to structure your property as a long-term rental or a short-term vacation rental. And you can decide when to dispose of assets or acquire new ones.
If you choose a crowdfunding type of arrangement, you probably won’t have control over the details of any renovation, but you should still get all the details on the project plans prior to investing so that you can decide if the investment is in line with your vision. This type of disclosure is one of the key factors to consider when evaluating crowdfunding services. And with most crowdfunding services, you get to choose your individual investments. This still provides more control over your portfolio than fund investing.
Greater Transparency
When evaluating individual properties, there’s less room to hide unfavorable indicators than in a large portfolio. As you look at each property’s performance and projections, you’ll be able to see clearly which properties are performing well and which are not.
Potential Ownership in the Underlying Real Estate
Ownership in the underlying real estate will vary depending on your investment method. If you purchase a property on your own, you get full ownership. If you choose a crowdfunding platform, you need to read the details of each deal carefully to see if you own only a share in a company or if you own a stake in the underlying real estate.
Potential for Instant Diversification
If you’re using the traditional method of investing, creating an instantly diversified portfolio could require millions of dollars to purchase multiple properties. But if you’re looking to invest $100k in real estate (or less), you could still build a diversified portfolio quickly and easily with crowdfunding. With low minimum investment amounts, you could spread your investment across multiple properties. This would give you a diversified portfolio in a matter of weeks or months rather than decades!
Cons of Deal-by-Deal Investing
Here are the potential downsides of deal-by-deal investing to consider.
Potentially Time-Intensive
Again, this depends on your investment method. Purchasing a property on your own requires dozens of hours (or more) of scouting neighborhoods, vetting potential properties, and negotiating deals. Renovation work can also cost you in terms of both time and labor. And then there are ongoing property management responsibilities to consider if you plan to manage a rental on your own.
Crowdfunding requires substantially less time. Deals will already be arranged by the funds’ sponsors, so you can simply review their projections for available projects, then choose from their offerings. Very little research time is required, and you don’t have to worry about managing a renovation or ongoing property management at all!
Potentially Less Liquid
While shares in whole funds can be traded on the open market quickly and easily, selling a property can take months. Selling a property can also be costly since you have real estate agent fees and other closing costs to consider.
With crowdfunding, you might be locked into a term (like the duration of a renovation project, for example). Some crowdfunded projects are fix-and-flips that might just require an investment period of 10-14 months. Others can be long-term rentals requiring five years or more.
Real Estate Investing with Gatsby Investment
If you’ve decided that deal-by-deal investing is a better fit for you than whole fund investing, we invite you to view the investment opportunities available from Gatsby Investment.
Gatsby is a real estate syndication company, which is a specialized type of crowdfunding platform. Gatsby offers deal-by-deal investments with complete financial transparency and a stable ownership structure that includes ownership of the underlying real estate. Our team of real estate experts analyzes hundreds of potential deals to find those with the greatest return potential for our investors. And with investment minimums as low as $10,000, investors can create a diversified portfolio instantly.
