The value of the global real estate market is estimated to be an impressive $228 trillion, making it the third-largest industry in the world following only healthcare and higher education. In the current market, the average millennial real estate investor’s net worth is $1.4 million. Simply put, only the top 10% in terms of wealth can participate in real estate markets. So where does this leave your average investor?
Real Estate is a Lucrative Investment for Building Wealth
1. The reasons people invest in real estate
Most people view this as a way to diversify their portfolios. Seeing the separation between the stock market and real estate makes this an ideal investment for people looking to secure wealth while making passive income
2. Receive passive income monthly from rental properties
The real estate market is very well known in the investor community for being one of the best forms of passive income or cash-flowing assets. With long-standing stability in the real estate market for over 100 years, a lot of investors believe this to also be one of the safest investments.
3. A long term safe investment
“According to a 2017 study examining investments across 16 different countries, the rate of return on residential real estate averaged more than seven percent annually. Comparatively, stocks averaged less than seven percent, while bonds came in around three percent. The study suggests real estate has historically been a strong investment opportunity for investors. This is because real estate allows investors to profit in more ways than one. First, by purchasing real estate you are investing in a physical asset that will appreciate over time. Real estate also provides the opportunity to generate monthly cash flow through rental income.” (Real Estate Vs Other Investments | FortuneBuilders)
This is typically only accessible to very few people, but now we have simplified a previously difficult and expensive process and made it affordable and accessible for everyone. Fractional real estate investing is a breath of fresh air for many reasons such as accessibility, affordability, and democratization of equity.
For additional information: Is Real Estate a Good Investment?
The Drawbacks of Traditional Real Estate Investing
1. Real Estate Requires Real Money
The average down payment for a home in early June 2021 was over $25,000. Traditional real estate investing requires a large down payment in addition to closing costs, plus finances to update and repair the property. The fees don’t stop there-- once the deed’s in your name, there’s insurance, mortgage payments, property tax, and additional maintenance to look after.
2. Making Money in Real Estate Takes Time
The learning curve for investing is one of the largest costs of time when it comes to making the right real estate investments. That is just scratching the surface with investment properties, the time one needs to maintain tenant relationships is extremely time-consuming. This is why many property owners delegate this out to property managers. This also comes with a large learning curve trying to identify which property managers would provide the best rates and services. Everyone knows the expression time is money, and all the time spent trying to self-manage investment properties is no doubt a very expensive ordeal.
3. Real Estate Is a Long-Term Investment
One of real estate investors’ most potent strategies for investing is to buy and rent out for 10 or more years. “The national average rent for a single-family home is $1,742 per month or $20,904 per year.” This would yield over $200,000 over a 10-year period. Traditionally, with the market infrastructure provided to real estate investors these properties as assets were extremely illiquid along with the high fees incentivizing illiquidity making real estate investing a sluggish process.
4. Real Estate Can Be Problematic
What many real estate investors overlook when it comes to renting out a property is the cost of bad tenants that don’t pay, leave the property damaged, or even both. This will leave the property owner in a very time and money-consuming predicament. Some states require up to three separate court cases to remove a non-paying tenant, summing up to a property owner's nightmare.
5. Real Estate Benefits Don't Always Apply
If you sell an investment property and buy another one within allotted times you can defer the capital gains tax on the initial property by utilizing the 1031 exchange. This often leads real estate investors to rush into purchasing properties within the limited time allowed for this commonly used tax benefit. The current administration has discussed removing or altering this tax benefit adding even more uncertainty to real estate tax benefits.
Here is a quote from the official IRS document:
“ The first limit is that you have 45 days from the date you sell the relinquished property to identify potential replacement properties. The identification must be in writing, signed by you, and delivered to a person involved in the exchange like the seller of the replacement property or the qualified intermediary. However, notice to your attorney, real estate agent, accountant or similar persons acting as your agent is not sufficient. Replacement properties must be clearly described in the written identification. In the case of real estate, this means a legal description, street address, or distinguishable name. Follow the IRS guidelines for the maximum number and value of properties that can be identified. The second limit is that the replacement property must be received and the exchange completed no later than 180 days after the sale of the exchanged property or the due date (with extensions) of the income tax return for the tax year in which the relinquished property was sold, whichever is earlier. The replacement property received must be substantially the same as property identified within the 45-day limit described above.”
For more information: The Disadvantages of Investing in the Traditional Real Estate Market
The Solution of Fractional Investing
Fractional ownership challenges the traditional means of securing real estate by democratizing the market through accessibility and affordability. By breaking a large asset like property down into shares, investing opportunities present themselves to a larger sum of people through more affordable housing options. Owning shares of real estate entitles investors to both partial ownership and a share of profits, without requiring near the level of expertise of full ownership.
It’s at this point that Pocket Properties comes into play, acting as a platform for building a real estate portfolio through buying, selling, and trading shares of real estate. Through the Pocket Properties mobile app, investors can access shares of real estate for less than $10 while retaining the same legal rights and benefits as a sole property owner. The process cuts maintenance, excessive paperwork, and complicated loan agreements out of the picture from the start, allowing for the enjoyment of a truly passive income.