When owning just one or two properties, real estate investors can become poorly diversified. It’s ill-advised for investors to become overly dependent on the performance of one investment because if there is an extended vacancy or large unexpected expense the profitability of a property can decline. Many investors choose to create property investing companies to take advantage of pooling their capital for larger investments and spread their risk exposure.
There are several methods investors employ to join together and pool their funds. It can be accomplished through the grouping of a few investors that have existing relationships or on a much greater scale whereby each investor represents a small fraction of the total investment pool. The most common type of property investing company is a REIT (Real Estate Investment Trust). REITs use pooled capital from many investors to purchase income producing properties and make loans to other borrowers secured by real estate.
Property investing companies can raise millions of dollars of capital and having this financial strength and size allows them to purchase larger properties such as hotels, retail shopping centers warehouses and office buildings. Many focus on a specific real estate sector and may invest based on their specific investment targets and strategies.
Property investing companies can take on many forms such as mutual funds. Some real estate mutual funds actively purchase properties while others invest in other companies that own and manage real estate. Pension funds are also large investors in commercial real estate property ownership, and then rent space as another source of income. State-controlled pension funds are sometimes large backers of statewide development programs. Insurance companies were a major source of lending for residential real estate companies after World War II, peaking at 23.5 percent of all residential loans in 1951. Since that time, residential lending by insurance companies has declined to less than 3 percent today, and they have primarily evolved into lending for commercial real estate projects.
By pooling capital and creating property investing companies, investors are able to join together and purchase larger real estate investments. This strategy can provide investors with greater diversification which can reduce the amount of risk associated with a particular portfolio. Furthermore, combining investor capital also opens doors to many additional opportunities that might otherwise be unavailable to individual investors, for example certain property types are generally too expensive for the individual investor.