Get Started in Real Estate with These 5 Passive Investing Strategies
Pick your poison (Happy Halloween)
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“I have some extra money laying around and I was thinking about investing in real estate… How do I get started? Is it hard?”
Lately I feel like I am coming across this question more and more. I think people see what is happening to the stock market and are beginning to realize that there might be something to this real estate thing. And of course diversification never hurt anyone.
I wish I had an easy answer to give whenever I get asked this question. I wish I could say follow steps 1, 2, 3, and bam you will be a successful real estate investor. The reality of the situation is that it takes time, energy, money, and patience to invest in real estate. Investing in real estate is not a get rich quick scheme. It certainly is not as simple as putting money in the stock market and watching it grow (please note: this is a bit of an oversimplification of investing in the stock market and you definitely should get educated before throwing money into stocks too).
The first thing I would advise anyone interested in getting started in real estate to do is to get familiar with the various types of real estate investing strategies. There are a myriad of options from Buy & Hold, Fix & Flip, Wholesaling, Short Term Rentals and so on…
I personally prefer Buy & Hold investing where I rent to long term and mid term tenants. This strategy allows me to build equity and save on taxes (please note: I am not a tax advisor and you should speak with a tax advisor before investing in real estate). I also like buy & hold because I am investing in an asset that I intend to hold onto for a long time that will appreciate and produce monthly income for myself. I like this more than renting on Airbnb as a short term rental strategy because it is less work intensive. Investing in a short term rental is like buying another job. I will be frank though, dealing with tenants is not for the faint of heart.
I am not trying to scare you here. I am trying to inform you.
The next couple of things I would ask as you become more familiar with real estate investing strategies are: How much time do you have to dedicate to real estate investing? Do you want to be an active investor or a passive investor?
You should know you have options. You can still invest in real estate without dealing with tenants or wielding a hammer.
Oh did I spark your interest there?
Yes, there are real estate investing strategies that tend to be a little bit more passive and require a less of a time investment. Education though is still a necessity.
Passive Real Estate Investing Strategies
(each decreases in passivity and increases in monetary funds required as you move down the list) :
REITS
REIT stands for real estate investing trust. It is a company that owns and manages income producing real estate properties (Wikipedia). You can typically invest in companies like you would a stock in the stock market. This is the most passive form of real estate investing.
Fundrise is essentially a crowdfunding company that allows you to invest in real estate. This is a little bit different than a traditional REIT. I’ve never personally invested in their funds because I prefer active investing and the returns and benefits that go along with active investing. Check out their website link above to do your own research.
Syndication
Syndication as a form of group investing. A bunch of people get together to pool their money to invest in expensive real estate properties that they wouldn’t normally be able to purchase alone (typically commercial apartment buildings, storage facilities etc.). Essentially an operator (company) works on acquiring a multi-million dollar real estate deal and then brings in many limited partner investors to purchase the property. They use the money to improve the property and increase the income (aka rent) over time and then sell or refinance the investment for a profit. Investors benefit from monthly or quarterly pay outs along with a share of the profits when the investment sells. This type of investment is regulated by the SEC and typically individuals with high net worth are able to participate. This is less passive then the above described methods because as a passive investor you must have a general understanding of this strategy, be able to vet the operators, the market, the deal and more.
Private Money Lending
With private money lending you as an individual can loan your hard earned money to another individual to use in their real estate project (i.e. a Flip, Buy & Hold, STR etc.) at a specific rate. When the property is sold or refinanced you will get your investment returned to you plus interest. Learn more about this strategy here. This is a little bit more time intensive and similar in commitment to a syndication because you must vet the person you are lending your money to. It is risky because it requires a certain level of trust but if you invest with the right individual it could result in a substantial return. This is something you can rinse and repeat with the same or multiple individuals.
Equity Partnership
Equity Investing is very similar to Private Money Lending because you are lending your own personal money. The difference is you are also benefiting from equity in the deal and the tax advantages that go along with that (again talk to a tax advisor about the specifics). This is essentially the long term buy & hold strategy without dealing with tenants, depending on the arrangement you make with your partner. With private money lending you typically invest from anywhere from 3 to 12 months (sometimes shorter, sometimes longer) whereas with equity investing you own the property and can hold on to it for years at a time. The agreement you make with a partner can be customized and repeated for multiple properties.
There is inherent risk and reward associated with all of these strategies. For that reason they are not completely passive. You must educate yourself enough to understand the risk and determine if the investment is the right choice for you. I suggest speaking with others who have utilized these strategies before or doing some research online before getting started. Speaking with a tax professional, financial advisor and/or lawyer will also help you determine if a specific strategy is the right choice for you.
The last piece of advise I will give you as you explore your options is this: Real estate is a very social investing strategy. By that I mean people are always open to network and share experiences. Networking is key to success in any industry, but with real estate I cannot agree more. Please do not hesitate to reach out and ask how I deploy these passive investing strategies in my business.
I wish you well as you pursue Financial Freedom.
Disclaimer: I am not a financial advisor, lawyer or accountant, I am only sharing insights from my own experiences. Please speak to a professional before investing in real estate or pursuing one of these strategies.