Articles, Investing

Real estate hedge funds versus direct investments: which is better?

Written By: Pierre Raymond
Reviewed by: Mike Reyes
Last Updated November 2, 2023

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You have several options when it comes to investing in real estate, including hedge funds, real estate investment trusts, stocks and direct investments. Two of the two best choices for investing in real estate are hedge funds and direct investments, but one edges out the other as the best option.

Differences between hedge funds and direct investments

Real estate hedge funds make multiple investments in real estate investment trusts, properties and other real estate-related stocks. It’s more common for real estate hedge funds to invest in REITs, but some do invest in properties as well.

Buying into a hedge fund makes it easy to invest in multiple properties, often with less money than it would take to buy a property outright. However, there are some tradeoffs to investing in hedge funds over properties directly.

Perhaps the biggest difference between these two investing methods is the fact that you pay performance and management fees to the hedge fund. However, there are no such fees involved in owning properties outright. You might want to hire a property management firm, but the services you get with such companies are different than just paying a fee to manage your investments.

Choosing where to invest

Another issue with investing in hedge funds is the fact that you don’t have any control over where you invest. You can choose the hedge fund, but you can’t choose what the fund invests in. On the other hand, you are in total control over your investments when you buy properties directly.

For example, you might want to invest in the real estate market because it is booming, and you don’t even have to live there to do so. You need property management services to take care of your affairs, which makes buying properties directly nearly as passive as buying into a hedge fund. The key difference here is having total control over your money.

How to invest in rental property

While hedge funds simply require payment, it will take more work to get set up as a landlord. You still have to do research. For example, will you buy a single family, or a fourplex? Although instead of researching fund managers’ track records, you are looking into different real estate markets and determining which offer the best opportunity.

However, if you don’t have enough capital to buy a property, you may have to line up financing. On the other hand, it is possible to line up financing to buy rental properties, while you can’t do it for hedge funds. You also have to be an accredited investor to invest in a hedge fund, but you don’t have to be to buy a rental property.

Accredited investors have a net worth of at least $1 million excluding their primary residents or earn $200,000 per year or hold some sort of professional certification or license in the financial industry.

You’ll find plenty of opportunities if you’re looking to get into real estate, whether it’s through hedge funds or by buying rental property. The real estate market is poised to make a roaring comeback as the pandemic winds down.

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