How to: 3 main ways to invest in Real Estate
Here are 3 main ways to invest in Real Estate to suit your needs.
1. Equity – Be the owner or partial owner.
2. Debt – Be the lender
3. Private REITs or Funds
There are fundamental risks associated with any investment. Do a google search for “rules of investing” and you will find a number of them on the internet.
We can all agree that it is PARAMOUNT you start with a PLAN!
One fundamental rule for real estate investing is to have the knowledge of the main investment structures in order to choose the model that works best for you and your plan (If you have not started one yet… Please reference above and start there) Let me emphasize .
Make A Plan! Now that I have made my point, let’s move on.
If you have a Self-Directed IRA, a 401K or Solo 401k, Pension Plan, another type of Retirement Vehicles or Cash and depending on what your plan is… i.e.- wealth generation, immediate monthly cash flow, or both.
The question you need to ask yourself is:
Do I want to do it, or do I want someone to do it for me?
DIY (Do-it-yourself) vs. DFY (Done-for-you)
I have talked with many investors over the years who strictly adhere to the do it yourself approach, and some have been very successful! They might take on a buy and hold, then might flip, but in every case these investors are committed to spending their own time and skills on making certain that they are the ones who win or lose. They have effectively created a side hustle or “2nd Job” for themselves. And that works for them. But it isn’t for everyone.
The other category of investors choose the “done for you” options. This is what I refer to as passive investors. They invest 50-100K or more with companies or in projects in the trusting that they select the right management teams and the best projects for their goals.
An even larger number of real estate investors straddle both categories optimizing their bandwidth and profitability by leveraging others. Opting for the “hands-on” profits that can happen on a DIY and putting a portion of their funds into DFY so that their money can continue to grow.
Here are some pros and cons to consider. Over the next 3 articles we will deep dive on each method that you need to know and fully understand in order to make well-informed decisions.
- Equity Investing – Be the owner or partial owner
Pros
- Highest potential return
- Depreciation shelters income
- Tax deferral with 1031 exchange potential
- Highest level of control in selecting investment
- Highest Level of Control of Asset and Management
Cons
- Highest risk if you don’t know what you are doing
- Illiquid for 3-7+ years (Equity should be considered a long-term strategy)
- May require state tax returns to be filed, depending on your state
- Usually requires accredited investor status, depending on if you invest yourself or work with a firm that partners with Non-Accredited Investors
- Little to no control or timing of sale, unless you have a properly structured exist strategy
- Little to no control of direct Management depending on if you choose DIY or DFY (Tip: Make sure to properly vet your management company)
2. Debt Investing – Be the lender
Pros
- Lowest risk
- Short time horizon (typically 12 months- 36 months)
- Typically backed by the asset in 1st lien position
- Typically monthly interest payments
- No state tax returns required
- High level of control in selecting investment
Cons
- Very tax-inefficient
- Requires foreclosing in event of default
- Usually requires accredited investor status
- No control in management of investment
3. Private REITs and Funds – Debt or Equity
Pros
- More diversification than individual investments
- May not require accredited investor status
- More liquidity than investing directly
- No need to select individual investments
Cons
- 0% control in selection of investments
- 0% control in management of investments
- You are at the mercy of what the REIT or Fund chooses to charge for Management.
- Okay, let’s discuss the companies that I think are worth considering for your investment dollars. Note that I’m not going to discuss individual funds in this post nor individual syndicators.
