Many investors want to invest in real estate, but they don’t want the responsibility of owning individual properties. To invest in real estate without the headaches, you can invest in a portfolio of properties with professional management. Real estate portfolio managers oversee a portfolio of properties to provide a successful return on investment for investors. Here’s what they do and why it’s important to investors. For more help with investing, consider working with a financial advisor.
Why Do Investors Buy Real Estate?
Diversifying your portfolio is one of the best ways to reduce volatility and risk. Adding real estate is one of the most popular alternative asset classes. These are many of the reasons why investors buy real estate:
- Earn rental income
- Serve as a hedge against inflation
- Use leverage (mortgage) to buy larger assets
- Take advantage of market trends
- Forced appreciation through rehab or remodel
Benefits of Investing in a Real Estate Fund
While some investors enjoy owning individual properties, many investors don’t want the risk or responsibilities associated with managing a rental property. When you invest in a real estate fund, professional managers provide real estate portfolio management and share the profits with investors. Here are a few of the benefits of investing in a real estate fund:
- Professional expertise. Real estate portfolio managers typically have decades of combined experience across their teams.
- Diversified investments. Instead of having your capital concentrated in just a few properties, your money is spread across a portfolio of properties to reduce risk and generate consistent cash flow.
- Property type and geographic diversification. Not only is your money spread across different properties, but some funds also offer further diversification by investing in different types of properties and real estate in multiple locations.
- Recurring income. Investing in a portfolio of properties reduces the loss of income compared to owning individual rental units. Small investors can be in trouble when a tenant moves out or remains unoccupied if a unit needs repairs or upgrades.
- Mortgages don’t affect your personal credit. Many real estate investors have personal liability when they use a mortgage to buy a rental property. A real estate fund doesn’t require you to personally guarantee a loan or use your credit to qualify to buy a property.
- No personal risk from lawsuits. When investing through a fund, investors have limited liability if someone sues. In a worst-case scenario, the most you can lose is what you’ve invested.
The Role of a Real Estate Portfolio Manager
A real estate portfolio manager takes care of all aspects of managing the properties. Their responsibilities include finding investments and tenants, handling tenant needs, collecting rents and disbursing profits to investors.
Here are a few of the tasks involved with real estate portfolio management:
- Identify and analyze potential investments. A real estate portfolio manager seeks out houses, buildings and other real estate that matches its investment criteria.
- Buy properties. Purchase qualified properties using money from investors and bank loans.
- Oversee day-to-day operations. Manages property managers, contractors, maintenance staff and other support staff to maintain properties, increase occupancy and maximize revenue.
- Compile accounting and reporting. Updates its accounting records to document revenues, expenses and capital improvements. Prepares reports for tax authorities and investors.
- Distribute profits to investors. Sends regular distributions to investors from the portfolio’s profits.
- Sell low-performing assets. When individual units do not expectations, the real estate portfolio manager investigates the cause. If they cannot fix the problems, the property is sold and reinvests the money into other units.
Should You Invest With a Real Estate Portfolio Manager?
Investing with a real estate portfolio manager is a smart choice for investors who don’t want to be hands-on with their rental properties. Some investors don’t have the expertise, while others don’t have the time to get involved. Investing in a real estate fund provides numerous benefits over buying individual rental units. Remember that when you invest with a real estate portfolio manager, you give up some of the perks of owning property directly. These benefits include:
- Decisions over properties. Portfolio managers do not include investors in real estate property decisions.
- Tax write-offs. Some investors can deduct depreciation and tax losses from their taxable income when they own individual rental properties.
- Control on when to take capital gains. You don’t control when or how properties are sold within the portfolio.
The Bottom Line
A real estate portfolio manager oversees a rental property portfolio on behalf of investors. They use years of investment experience and industry knowledge to find, analyze and purchase rental properties that match their fund’s investment criteria. In exchange, investors receive regular distributions from the fund, periodic reports of the fund’s performance and annual reporting for taxes.
Tips for Investing in Real Estate
- Investing in real estate with a portfolio manager is one of the many ways to diversify your investments. But how do you know how much to invest in which asset classes? Our asset allocation calculator helps investors determine where to invest based on their answers to a simple questionnaire.
- A financial advisor works with investors to identify the ideal portfolio mix to meet their goals. By getting to know the investor and their needs, an advisor proposes the types of accounts and investments to increase returns, minimize taxes and reduce risk. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Photo credit: ©iStock.com/PrathanChorruangsak, ©iStock.com/CHUNYIP WONG, ©iStock.com/ArLawKa AungTun