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b&b133 How to invest in real estate without having to buy a house (Fundrise explains REIT’s)

Is there a way to invest in real estate without having to buy a house? On this week’s show, we invited Kendall Davis, who manages Investments at Fundrise, a Real Estate Investment Trust (REIT) company, to discuss the benefits, potential rewards, and main risks to consider when investing in a REIT so you can decide if it makes sense for your portfolio.

A REIT is a Trust that purchases multiple real estate properties, usually multi-family homes or big commercial buildings, and pools together investors’ funds to make the investment. It’s a way to invest in real estate without having to deal with the headache of being a landlord.

Kendall walks us through the main things to look out for when researching a REIT, the potential returns, and the main drawbacks of investing in such a product.

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Episode Highlights:

Kendall: The other issue with publicly traded REITs that you might see is whiplash. Let’s pretend there’s bad news out of China that beats down the market. It might be completely unrelated to the individual fundamentals of the properties within the REIT, but you could see some volatility. You could see that price drop. So really that’s not something that an individual might want to see in their portfolio, especially if all of the other assets that they own are publicly traded as well. It really limits your diversification.

Kendall: There is some effect of, obviously the fundamentals of the underlying real estate are going to be impacted by the broader market health, but it’s much more on an economic level. So you’re looking at, you know, how is job growth? How are the fundamentals in a given market, and how is that impacting our properties on a property level? Rather than “How do people feel about the market today, and how is that sentiment impacting the share price?” I like to think of it as sort of a less sentimental, more fundamental way to value the share.

Kendall: The common theme, having been in three different parts of a bank, was that the banking system is really not setup for individuals, and does not use technology at all, and to me was very broken. I think there were a lot of talented people there and it was a great place for me to start my career, but ultimately I did not see myself there for the long haul because of those huge issues.

Kendall: We moved over to the REIT structure, which is much better for diversification, because, unlike an individual project where you just only invest in one building, we found that, really, you’re better off spreading those funds over many different projects because if one project goes bad your funds are spread out over several others.

Kendall: I think it is absolutely the best thing you could do to go into every investment with an eye towards a level of distrust, and I think that the best thing you can do is to automatically assume that you need to do all the work yourself to make sure that you are underwriting whatever person you are investing with. And when I say underwriting I mean you wanna read through any documents they have. It might be a long document or it might be a lot of documents, but you need to do the work to dig through and make sure there aren’t any sort of hidden terms or things that concern you.

Kendall: A comfortable benchmark that many say that roughly 10-15% of an overall portfolio should be dedicated to alternative investments, and real estate is just one of many different alternative investments. So when I say alternative it’s alternative to publicly traded stocks for example.

Kendall: You tend to do better when you’re diversified…It’s an easier mode of investing, and you don’t need to be an expert to do it. There’s a lot of work and due diligence, particularly if you’re willing to write that large of a check in one asset, you better know a lot about it, you better know what you’re doing, and you better be willing to do the work.

K: Back when people started purchasing things online that felt really scary too…I think some of it is an education just in getting to know the investment specifics and how they work in order to establish that comfort level, but to me having that sense of discomfort is just inherent in being new to something

K: Some people find real estate very easy to learn because they’ve lived in a house before and its a concrete asset that they can look at. I think a lot of people find stocks to be very nebulous and difficult to predict and irrational at times. I can definitely say that the real estate market has at times behaved in ways that you wouldn’t expect as well, so there’s certainly risk to every type of investment, but it’s really up to you and your own comfort level. I think the most important thing an investor can do is to really try to do the learning, the reading, read as much as you can, read The Wall Street Journal, keep up with the news. What’s going on in the world and how, trying to understand how that might impact your investments, but I also think just starting small is a good place to get started.

Kendall: [Quprestions to ask before investing] How long can I keep my money locked up? …How much cashflow do I need on a regular basis? …Do I have something that I absolutely need these funds for in the next five years? Could I afford to lose some or all of my investment?