There are quite a number of ways to invest in real estate, but I know right now that I’m not quite cut out to do many of them, especially the ones that involve private lending, lease options, fumbling around with tax liens and the sort. I just don’t know enough about these methods, and frankly, they don’t interest me.
But we ARE quite interested in diversifying into real estate: it’s just that we’re probably going to use more conventional approaches when doing so.
These are the methods we would potentially look into in this realm of investing. It just doesn’t seem to be the right time right now, but at some point when we sense a market trough, we’re jumping in!
Ways We’d Invest In Real Estate….Maybe
#1 Landlording for the long term
I’ve had some friends who have been incredibly successful as landlords in the California real estate market. One of them has used the buy-low and hold strategy for some time now — having taken advantage of the low prices in the mid 1990’s to enter the market. He’s a very conservative investor, putting down large down payments for a couple of properties to achieve positive monthly earnings from the rent he receives. I also know another couple who got into the market in the early 2000’s and with no assets, have managed to do very well by using heavy leverage throughout the last half a dozen years. I think if we ever try this, we’ll be the type of investors who’ll fall between these two profiles. We’d like to use leverage but not go crazy with it.
#2 Purchasing real estate but hiring a property manager to handle its management
Eons ago, when I was at the tender age of 23, I played the role — of all things — of a property manager, representing my father as he leased out a modest piece of property. The property was not local to him, but it was to me, so I was assigned the chore of dealing with the rental. I didn’t enjoy the process at all, as I had to deal with a series of tenants who were either notoriously late with their payments or who I clashed with over damages to be covered by their security deposit. So if I ever get into landlording again, I believe I’m going to outsource the job to an outfit first and see how it works. Around Silicon Valley, the cost is 8 percent (fees range from 7 to 10 percent of collected rent) for someone else to screen and select tenants, collect rent, deal with repairs and property maintenance and be the ultimate go-to by renters.
#3 Investing in REITs
We already have exposure to residential real estate through our home. So how about diversifying into commercial real estate? What easier way is there than putting your money into REITs? I like the idea of investing in real estate investment trusts because from my perspective, they’re easy to work with. They’re fairly liquid, can be purchased like stocks, and will provide you returns through dividends and appreciation of your original investment. Exposure to real estate via REITs can be done via individual stocks that represent companies that do both residential and commercial property investing, or through mutual funds and ETFs as well.
#4 Buying and selling property (flipping)
The strategy here is a simple matter of trying to buy low then selling higher. Who hasn’t heard of people who’ve made a fortune buying decrepit structures, doing some renovations then selling these made over homes for a tidy profit? Again, because the concept is simple, it also seems alluring. And by virtue of the idea being easy to understand, I can see how we may consider this a potential way to invest. However, it’s my least favored approach to trying out real estate due to the fact that we don’t see ourselves as shrewd renovators. Since I enjoy and love the idea of rehabbing a place to perfection (though I’ve never done this before), I doubt very much it’ll turn out to be a cost effective experience for us as we’ll probably overspend ourselves to losses quite early on. Though we can entertain the thought of trying this out one day, we’ll probably pass.
Our Bottom Line
As I’ve already mentioned, there are tons of ways to make money with real estate but have only mentioned the ones that we find ourselves remotely considering at some point. When the time is ripe, we’ll try to carve out a piece of our investment portfolio and allocate it to real estate. At this time, we’re going to try the investment strategy that we find ourselves most comfortable with, which is to invest in REITs. With our very busy lives, we find that this form of investing is the easiest to deal with, involving the smallest learning curve and the one we’re most familiar with, given our past experience with the equity markets. We especially like the liquidity that REITs offer and the fact that we won’t have to worry about entering into big transactions, additional loans, tenants or property management issues. We’re forgoing the power of leverage but trading it for minimal maintenance and record tracking, and the way things are currently shaping in our world, that’s just the way we like it right now!
Image Credit: Hemmy.Net; Habitat67.com — where you can purchase or rent a unit.
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{ 16 comments… read them below or add one }
Hi there.
Love this article. Perhaps a word to the wary: House flipping is very VERY hard to do, and is a lot like market timing. The trick, of course, like you mentioned, is to buy low and sell high, but in order to do so, you need to make a significant investment into the property and hope that whoever buys it from you thinks the value of the renovations is more than what you paid for them.
Also beware of carrying costs. Every month that you have to pay the mortgage (if you didn’t pay cash for the property), bills, etc, just eats into your profits.
House flipping can be very profitable, but only for those with renovation experience and a good knack for what to buy in order to make the house saleable to the largest possible crowd.
It sounds like you are pretty set against flipping already, but perhaps this will discourage you even more!
Sincerely,
Marc-Andre Belair
Financial Planner
That building in the photograph is in Montreal, right? It looks like a badly-played Tetris game.
@Marc-Andre: I doubt we’d get into flipping unless we really knew what we were doing. I do have relatives and friends who do this and once in a while they try to talk us into investing with them. Haven’t yet bitten though.
@Rich Minx: Yes, it’s in Montreal. Check out the image credit at hemmy.net. The housing complex is called “Habitat 67” and is the unique product of someone’s fertile imagination.
SVB –
One area you didn’t mention directly is investing in RE joint ventures or funds. I’m currently planning a rehab/flip of a SFH in the area, and eventually will be looking for equity partners to provide the funding. I know the rehab part, just don’t have the liquidity to finance it just now.
So, some investment vehicle like that (i.e. you bring the $$) could be another opportunity for you, as it’s in real estate, but you don’t get your hands dirty.
DISCLAIMER: I am NOT soliciting investments here, so don’t even think about it folks…
Shawn,
I have seen this symbiotic relationship work out for some friends. Though they had different RE goals (desiring to become landlords), they pooled their skills and resources together to purchase an apartment building in Oakland. I haven’t yet checked to see how they’ve done so far. Actually, I have family who’ve tried limited partnerships in the past while trying to get into commercial development and unfortunately, they lost quite a bunch of money during the 80’s downturn (in Texas and L.A.). So it’s gotten us a little gun shy about putting money on the line this way. But I see the point of being a passive investor in this sense while having someone do the heavy lifting on the rehab/flipping side.
I understand the gun-shyness. We’re still in the due diligence phase of our project (the first we’ve done with other peoples’ funds vs. just our own). The adage of “you make your money in RE when you BUY, not when you sell” is constantly on my mind. Since appreciation will no longer cover any “mistakes” in the process, the project/deal must make sence standing on it’s own.
I agree with buying and holding as a landlord with a property manager. That is something I’m doing and have been doing for 20 years. I’ve flipped a couple of houses, but I lived there during the construction putting loads of time and energy into the renovations, so I don’t knnow if that’s for me personally as a business. I do it with the apartments/ houses I buy to live in, but not primarily as an investment. Takes too much time away from what I do for a living.
Investing in REITs is something I hear about all the time, but I don’t know anything about it.
I’m glad to read a post about real estate investing that is realistic and doable.
Interesting article. And the posts were great also.
My father is in real estate and has done mostly residential real estate and some commercial. He’s been approached by a friend who is also heavily experienced in real estate with a plan to open a wedding/banquet hall with a hotel as well on 20 acres of a downtown spot – he wants my dad to be a partner and invest half a million to 3/4 million. Does anyone here know of the risks inherent with opening a banquet hall/hotel together or know of a site that can help me better research this so I can advise my dad? I would appreciate any and all help. Thank you.
nice post. yes the picture looks like a pile of legos… cool… i wish i could visit that place some time. more power!
Marco
Nice post. I was also wowed by the photo. It looks a bit like container apartments that I recently saw.
I’ve done (and am doing) #1, but don’t like it too much as I don’t do #2. #2 makes life easy, but the cost is too high if you look at the impact on your overall ROI from the investment over the long term (say 20-30 years). #3 can be a good alternative, especially as it can provide exposure to more lucrative real estate investments (such as commercial properties) that aren’t really suitable for direct investment by a small, private investor due to the cost and need to diversify. #4 can be good if you have the knack for spotting bargain “fixer-uppers” and know how to control costs and manage a project and tradesmen. It can also be a black hole if you get it wrong.
ps. If you renovate the property to sell at a higher price it isn’t really “flipping” – that term relates more to fast turnover wheeling and dealing: spotting a bargain (or haggling for a great purchase price, eg. with a distressed widow who wants to sell up), and almost immediately selling the same property, without any more than cosmetic improvements (eg. slap on some fresh paint and tidy the garden) for a higher price.
That seems like a nice conservative mix of real estate investments. That is of course if you know what you’re doing and do as much research as possible. #2 is probably carries the least amount of stress and the least amount of return.
I think Flipping is the most doable but very time consuming nevertheless. In principle it’s easy and I really think its purely the time factor which would kill most people, not the maths or the technical aspects.
I like to look at it in terms of cash flow and cash “chunks.” Flipping is a chunking strategy and doesn’t provide for long term cash flow or passive income. I like #2 the best – property management companies managing your rental units but I disagree with REIT’s. To me investing in a REIT is like investing in a mutual fund where you let someone else manage your money. Better to do a self directed IRA and invest in real estate on your own.
I like how the situations are explained to give us concrete scenarios and advice regarding real estate.