4 Ways to Get All the Benefits of Real Estate and None of the Headaches
Updated: Jun 23, 2020
Sounds too good to be true right? Passive real estate investing can free up your time so you can do what you love to do!
Have you ever wanted to invest in real estate, but you didn't want problems of annoying tenants, leaking toilets and trash?
Those are a few of the reasons that might have scared you off from investing in real estate. Another may be committing your money long-term, the fear of potentially losing money or the fear of buying a bad deal.
What if I told you there's another way…an easier way where you can get all the benefits - the monthly cash flow, the generous tax deductions, equity build up by priciple paid down, and even long term appreciation? Well of course there’s a way and its called Passive Investing.
Passive investing is when you bring in the capital and invest it in a project, and that is your only responsibility. You do your initial homework on the team and deal, then you get to collect all of the income and tax benefits.
So let me walk you through 4 different passive income options.
1 - Residential turnkey homes
Almost everybody knows about residential houses, you may have lived in one, owned one or maybe you invested in one as a rental property and managed it yourself. For a lot of people who live in the coastal markets where the property values are too high, it just doesn't make sense to buy a house as a rental property. There's a special class of "turnkey" residential investments which means you are able to purchase the property with a tenant inside who's paying rents. The property was professionally rehabbed and is managed with a certified property management company so that you receive monthly income directly deposited into your bank account. Typically, these types of investment properties are in the Midwest or Southeast in markets where the price points are around $75,000-$200,000 and the rents are between $750 and $2000 per month.
Pros
Lowest cost direct ownership
Monthly income
Tax deductions
Equity build up through loan pay down
Use bank financing for as little as 3% down
Control over sale of property
Cons
Value dependent on neighboring houses
Vacancies can be costly
Difficult to scale
2- Commercial Syndications - multifamily, storage, commercial
Another type of passive investment is a syndication, this is where you purchase shares in an entity that owns a larger commercial property. This commercial property would be for example, a multi family apartment, senior housing, student housing, industrial warehouse, etc.. This type of investment is run by a team with skilled operational experience and strong analytical abilities to identify properties that are not performing to their potential. This is usually in markets with strong population growth, increasing jobs, increasing medium income, decreasing crime and great school districts. All of these factors allow you to increase the net operating income which will multiply towards the value of the investment based on the trading CAP rates.
Pros
Forced appreciation
Quarterly income and payout on exit
Tax deductions
Economies of scale
Working with high level professionals
Cons
Ownership in shares of LLC
Larger investment 50K+
Must be accredited or sophisticated status
Less liquidity - holding period typically 5-7 years
3 - Peer to Peer lending
If you have a friend, family member or even a trusted investor that needs money for their projects, you can lend them cash as though you are a bank. This loan will be securitized by the investment or other collateral so if anything goes wrong are covered. This type of passive investment is very common for individuals who want a shorter commitment of 6 to 24 months with the ability to earn a higher interest rate between 8% -15%. This option beats out a CD or high interest savings account all day long.
Pros
High interest rate
Monthly or balloon payments received
Short investment term 6months - 24 months
Cons
No Tax benefits
Less upside
4 - Dividend based stocks in REIT
Properties in a REIT (Real Estate Investment Trust) portfolio may include apartment complexes, data centers, healthcare facilities, hotels, infrastructure—in the form of fiber cables, cell towers, and energy pipelines—office buildings, retail centers, self-storage, timberland, and warehouses. Buying shares in commercial real estate portfolios into a publicly traded REIT gives you the most flexibility in terms of a real estate investment play. These publicly traded stocks or funds are 100% liquid and you can choose the asset class or diversification level that you would like. This will be no different than choosing a stock in the stock market, but with the focus on a diversified real estate portfolio holding.
Pros
Diversification
Liquidity
Short investment term
Typically established performing companies
Cons
No Tax benefits
Lower returns
**With any of these options remember to do your homework on the team, their track record and asset classes**