3 Ways to Invest in Real Estate
Author: Haydn Zeis, April 7, 2020
In this short article, you’ll learn about a few different ways you can invest in real estate. Some investment types are higher risk than others, but the best thing about real estate is when you make a mistake, it would be very hard for your property value to go to zero; real estate is a resilient investment that’s backed by physical assets, land and buildings.
Some investments are more passive than others and each have their merits (Read about the pros and cons of passive vs. active investing).
Syndication is a way for passive investors to own properties larger than they could purchase individually. The General Partner of the deal, sometimes called the sponsor pools investor capital together to purchase quality investment property.
This is my favorite way to invest because, the sponsor does not get paid unless the investment performs as advertised. Typically the deals have a waterfall structure causing the interests of the sponsor and the investors to be aligned. Investors receive between a 6-8% preferred return and are owners of the real estate. They get the same benefits as if they owned the property on their own, appreciation and principle paydown to name a couple.
The process of investing in a syndication looks like this:
Vet the Sponsor Check this out this article for vetting sponsors
Analyze the Deal The sponsor will have created an offering memorandum for your analysis
Investment Management Collect quarterly or monthly checks Sponsors take care of the rest
Syndication investing is completely passive for the investor. The sponsor of the deal manages the investment from beginning to end.
Hard Money Lender
Essentially, the hard money lender (you) would act as the bank to the investor (person receiving your capital). While less passive than syndication, hard money lending can be passive if the lender partners with third party underwriters or trusts the judgment the investor.
Often the interest rates on hard money loans are in the range of 10% and are short term. The most common type of project a hard money lender loans cash on is fix and flips. The lender would require the investor to pay a small down payment of 10-15% of the purchase price. Then the lender would loan the money for the purchase and rehab. Rehab capital is normally given to the investor in draws, not a lump sum.
Being the lender, you have the first lien on the property.So, if something goes wrong, you retain the asset after a foreclosure. It’s important to note, that in the event something does go wrong, the project is no longer passive, it becomes active.
Hard money lending can be quite lucrative when done responsibly. Choosing the right person to lend to, who has a good track record, is the most important aspect of hard money lending.
Buy and Hold Rentals
A buy and hold rental strategy is owning residential or commercial property and renting it to another for their use, long term. Unlike a passive real estate investment, buy and hold real estate rentals require a time commitment.
The process of purchasing a buy and hold investment property looks like this:
Search for the property MLS Local meet ups Investment groups
Analyze the deal Use local statistical data to analyze the opportunity Compare expenses to historical expense data Compare property to other similar investments Research tenant and current rental rate
Purchase the property Engage lender Arrange financing Close deal
Property Management Collect rent Take maintenance calls Find new tenants Sign leases Manage accounting
Typically, banks require the investor to make a 25-30% down payment and personally guarantee the debt. Lenders like to see how the property has performed previously, so having that information handy will help the lender feel more comfortable.
When you purchase an investment property, you make money several ways. The most obvious is cash flow from rental income. Additionally, the property appreciates over time, and you have someone else paying down your mortgage. Also, investors get to enjoy several tax benefits.
Overall, there’s no one size fits all real estate investment. Just like your financial advisor always suggests, diversity is key. Finding the right investment strategy for you depends on where you are in your career and life. Passive investing isn’t suitable for some, just like active isn’t for others. Some people find that investing in a combination of active and passive real estate deals is the best strategy. Whatever you find is your best route, good luck!
Feel free to reach out to me anytime if you’d like to chat different strategies!
Haydn Zeis - Principal
Lonicera Management, LLC
April 7, 2020