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Guide to Passive Real Estate Investing

Why Real Estate?

The real estate transaction market is huge, with $11 trillion invested in real estate.  Each year there are around $250 billion of commercial real estate transactions.  A study of individual’s wealth reveals that huge fortunes have been attained and, importantly, maintained through investments in real estate.  There are many good reasons why there is so much interest in real estate:

  • Real Estate is a Hard Asset
    Unlike Stocks, Bonds and Cash, hard assets such as real estate are those with intrinsic value and are generally an excellent hedge against infl ation.
  • Real Estate Produces a High Cash Yield
    Real estate produces cash yields substantially higher than those seen in stocks and bonds.
  • Real Estate can be Leveraged
    While it is often diffi cult, unwise or counterintuitive to borrow against Stocks, Bonds or Cash, Real Estate can be easily and productively leveraged. Mortgages make real estate both more profitable and aff ordable than would be the case in their absence.
  • Real Estate has Tax Advantages
    While Stocks, Bonds and Cash can all be heavily taxed in one form or another, real estate yields substantial tax benefi ts such as depreciation and the deduction of interest payments from taxable income.
  • Real Estate allows for Rapid Equity Buildup
    Increasing real estate values and the principal repayment of mortgage debt results in increasing equity buildup. Bonds have NO equity buildup.

So let’s compare the 4 major asset classes:

Real Estate, Bonds, Stocks and Cash.  Real Estate is far and away the most attractive asset class in the key comparable measures.

While individual markets for different investments become more or less attractive as the domestic and international markets change, real estate has consistently increased in value and has been less volatile than alternative investments.

Let’s look at the empirical evidence regarding the investment returns generated by real estate.  Since 2000, commercial real estate investments in apartments, retail and office have all increased in value with an average increase in value of around 117%.  During that same time period, the S&P 500 increased by only 29%.  Real estate investments have dramatically outperformed the stock market, and have done so with less volatility.

Real Estate also provides the best risk adjusted return of any asset class. Examining the chart below, over the 20 year period from 1993 to 2013, Large Cap Stocks, S&P Stocks and Small Cap Stocks have provided comparable returns to Commercial Real Estate. However, the volatility risk and standard deviation of stocks is substantially higher than Commercial Real Estate.  On the other side of the spectrum, while U.S. Treasury Bonds are associated with a lower level of risk, Treasury Bonds achieved returns that were approximately half the level earned through Real Estate investments.  Commercial real estate has an attractive historical performance of producing the highest return of these major investment classes while achieving a lower level of risk.

20 Year Risk-Return of Various Asset Classes

In addition to the great yield and long term returns generated by real estate, another benefit is that real estate is a great hedge against inflation.  Historically, inflation has caused property values to increase.  An added benefit to the value of properties going up is that you can also charge more in rent.  So inflation is a great thing for real estate investors.  Given the recent low interest rate environment and pending increase in interest rates predicted in the future, it is predicted to cause a long steady increase in inflation AND real estate values.

What Do Professional Investors Say About Real Estate?

The famous Yale Endowment Fund Manager David Swensen, who manages over $20 billion, recommends that investors place 20% of their assets in real estate.  Over the past 20 years Yale has generated a stellar 14% return, while the S&P 500 generated around a 9% return. Swenson attributes this 50% improvement in performance to the funds’ investments in Real Estate.  Here is Mr. Swensen’s asset allocation for Yale’s $20 billion portfolio.

David Swensen is not the only professional investor to have spoken highly of real estate, Gary Kaminsky, Vice Chairman of Morgan Stanley said:

“After a year where the Standard & Poor’s Index rose 30 percent, millionaires are turning toward alternatives such as Real Estate, direct ownership of residential and commercial properties is the Number One alternative investment pick.”

Tiger 21 (an exclusive investment club for individuals with at least $10 million in investable assets) members have also increased their average allocation in Real Estate to 21%, up from 19% a year ago.

What Are the Different Kinds of Passive Real Estate Investments?

Passive real estate investing generally occurs through one of two instruments, either a Real Estate Investment Trust (REIT), or through Direct, Passive Investment.

A REIT is a corporation or business trust that buys, rents, leases, and sells real estate.  REITs can focus on different kinds of real estate such as office, retail, multi-family, triple net lease, student housing, self-storage, etc.  The interest in REITs is that they pay investors dividends earned from passive real estate investments. REIT’s are usually publicly-traded stocks and, as such, their value varies with the market.  A REIT holds a bucket of properties of varying quality.  Investing in a REIT is a popular way to “diversify” into real estate.  However, remember that when you invest in a REIT you do not actually own real estate, you own a share of stock in a company whose primary business is owning real estate.

Attributes of REIT Investing

  • High Fees – A REIT can charge fees of up to 17% up front before your investment even touches the real estate.


  • Lower Average Returns – The average publicly traded REIT dividend is 3.4%, significantly lower than average returns from direct commercial real estate ownership.  Many individual properties can distribute an annual cash return of 8%.
  • Volatility – Given that REIT shares are typically stocks traded in a public stock exchange, they are subject to the high volatility and market shifts of the stock market as a whole.
  • Less Transparency – Although REITs have strict reporting guidelines, most investors know very little about the properties in a REIT portfolio. Direct real estate ownership increases the overall transparency of the investments.

Here is a comparison of the S&P Shiller 20 City Real Estate Index compared to the performance of a Blackstone REIT which shows the volatility of the Blackstone REIT stock price.

S&P/ Shiller Real Estate Prices vs. Blackstone REIT Stock Price

If your primary objective is to participate in the numerous benefits that real estate has to offer, then a REIT does not achieve many of those goals.

In a Direct, Passive Real Estate Investment an individual is able to participate in acquiring a specific physical property.  So how does one find a direct, passive real estate investment?  New investment vehicles have been created to allow individual investors to aggregate their direct investments into specifically identified properties.  The important feature of these new passive, direct real estate investment vehicles is that the individual investor does not have to actively manage the property; they are managed by an experienced real estate professional.  So the attractive elements are that the investment is passive and the investment is made into a specific property that is identified.  Unlike REIT’s, direct investments are not traded on public markets, as such the value of your direct investments are not directly correlated or effected by crashes and hiccups in the broader markets.

What are the Benefits of Direct, Passive Real Estate Investing?

Active investment in real estate involves buying condos or other direct property and will invariably lead to day to day hassles associated with managing the property such as tenants, toilets and trash.  Here are the benefits of passive real estate Investing:

How Does Passive, Direct Real Estate Investing Reduce My Risk?

I am Ready to Invest in Real Estate.  Now What?

If you are interested in passive real estate investing, the first step is to find a great partner.  CityVest’s goal is to find, analyze, structure and invest in great commercial real estate opportunities.  We then provide you with the opportunity to browse and select an investment that you like.  We handle all of the details of structuring the transaction, setting up investment entities, dealing with the sponsor, monthly/annual accounting, distributions to investors, and the eventual sale of the investment.

CityVest would be happy to share with you our insider access to the select investment opportunities that we decide are worth moving forward with.  So you do not have to spend 40 hours studying 100 different investments, we narrow down the choice to only the best one or two for you to analyze.   After browsing and selecting an investment, you can review the documentation, sign the documents through a simple but secure on-line process and then conveniently and securely transfer your investment amount.  Our on-line dashboard will keep track of your investments.  You get all the benefits of real estate investments without the hassles.  Never has real estate investing been so easy.  Now it’s your chance to take control and join with institutional type investors in the benefits of commercial real estate investing.

About CityVest

CityVest is an online marketplace for investors to combine their investment online and invest in real estate such as retail centers, apartment buildings and office buildings.  Our secure website provides investors the ability to browse different kinds of real estate investments, conduct due diligence, invest on-line and track the performance of their investment.  For more information on the CityVest marketplace of real estate investments, please visit us at

Posted by Alan Donenfeld February 19, 2016

Building Real Estate Wealth

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