Residential, Commercial, possibly Industrial
…this can be an exciting and fun way to invest in real estate without getting your hands dirty…
If you have the money and no desire to be hands-on, you can finance someone else’s flip or investment. It’s helpful if you know something about the process but if not, have someone look over the proposal before you put up your money.
- Step 1. Let people know that you’re looking for an opportunity – join an investment club or be proactive and talk directly to developers by stopping by their jobsites or contacting real estate agents.
- Step 2. Find and evaluate opportunities – you’re naturally anxious to get started but take a breath and take your time. Look for an excuse to not invest in the project rather than the reverse. Ask for references and visit past projects before choosing a partner.
- Step 3. Decide on the structure – will you be a partner involved in management decisions and share in the profit or loss or a straight investor who gets paid an agreed percentage regardless of whether the project makes money? Are you prepared for the worst-case scenario of the developer going bankrupt and your having to foreclose on the property?
- Step 4. Stay involved throughout the process – this is your money so, at least the first few times that you work with someone, make sure they know that you’re interested and involved in the outcome.
If you choose the right developer, this can be an exciting and fun way to invest in real estate without getting your hands dirty. It can also be an excellent learning experience if you’d like to do your own projects one day. Make sure that you and the developer share mutual respect, even if you’re a straight investor, there’s an element of partnership required.
…Look into the REIT Market…
If you are able to invest your money for a few years with a low level of risk and a decent return, consider a REIT. Your financial advisor can probably recommend some good ones. I like a mix of domestic and international holdings but choose a REIT that feels comfortable to you and that has a good track record of paying reliable dividends.
- Step 1. Find a financial advisor who has some knowledge with the REIT market – your financial advisor should have a fiduciary responsibility to you and not to the fund. You will have to pay this person but the advice you get will be based on your needs and not on which company has the best bonuses that month.
- Step 2. Decide if you’ll invest in one REIT or spread your wealth over several REITs. Understand the liquidity risks. Many REITs require that you keep your money invested for a specific amount of time.
- Step 3. Do it – choose one and write the check!
If you have investment real estate, it may be possible to sell the real estate and invest the proceeds into a REIT using a 1031-Exchange***(define). This would allow you to defer the tax on the profit. Effectively getting you out of hands-on real estate investing but without the tax burden.
…BUY & HOLD…
On the other side of buying and selling is buying and holding. In this scenario, you’re buying one or two properties a year, getting them rented with reliable tenants and watching the checks roll in. This strategy works for residential, commercial and industrial properties.
- Step 1. Learn the market – understand the average per-bedroom or per-square-foot rental rate and what features differentiate the various quality levels.
- Step 2. Locate a property with a favorable cap rate and below-market rents. Review leases and evaluate tenants. If possible, talk with tenants and see which would be willing to stay if rents increased. Ask for the building to be delivered vacant if you plan to make major renovations or are not satisfied with the credit-worthiness of the existing tenants.
- Step 3. Make some investment in the building or grounds that will be immediately felt and appreciated by the tenants. Raise rents.
It’s possible to do a kind of slow flip by buying properties where rents are lower than the market and perhaps the property needs some work or can be restructured to improve things like parking or floor plan. Secure higher rents from new tenants or existing tenants. This will increase the cap rate of the building and thus its value to future investors. Now you’re ready to sell or refinance.