I love to buy rental properties and flip houses. When I buy rentals or flips, I buy proprieties way below market value which gives me a huge advantage. When I buy below market value it takes patience, hard work, the ability to act fast, and knowledge of the market. It is not easy to buy flips or rentals like I do, but it has paid off greatly. Some real estate investors don’t have the time or the patience to get amazing deals on homes like I do. Luckily there are still many ways to invest in real estate that are much simpler and easier. You can invest in a REIT, partner with an investor, invest in turn-key rental properties or invest in real estate crowd funding.
Is investing in a REIT really investing in real estate?
A REIT is a real estate investing trust. Most REITs are made up of giant real estate trusts that invest in apartment buildings, commercial projects, healthcare facilities, mortgages, or single family homes. Investing in a REIT is similar to investing in the stock market. You buy shares of a REIT that can be sold easily, but you lose many of the advantages of investing in real estate directly.
- With a REIT you cannot get a mortgage to put less money down than the full investment.
- With a REIT you lose many of the tax advantages of real estate.
- With a REIT you have no control over the investments or management.
- A REIT can be very susceptible to stock market ups and downs, where real estate may not be.
- With a REIT you cannot buy below market value like with real estate.
Investing in a REIT is much like investing in stocks or a mutual fund. It is easy to get your money in and out, but you lose much of the control. I have invested in REITs in the past and they seem to follow the market as far as returns go. I definitely make more money on the real estate I invest in directly than a REIT, but REITs have performed very well in the past. REITs have made more than a 20 percent return a year when the real estate market was strong and have lost that much as well when it was weak.
How to invest in real estate using crowd funding
Another way to invest in real estate that is becoming more and more popular is crowd funding. Crowd funding is when many people invest a small amount of money into one project. Real estate crowd funding may involve building a new apartment building, raising money for a flip or many other real estate projects. Usually an investor can invest as little as $5,000 into a project that they chose. They earn an interest rate on that money based on the perceived risk. Interest rates can often pay more than 10 percent. Investing in crowd funding is not as easy as investing in a REIT, but it is not very difficult. Here are some differences between buying an actual house and using crowd funding.
- You are the lender so you lose many of the tax advantages of real estate.
- You cannot get a mortgage to finance the investment.
- Returns can be great, but still not as good as many real estate investments.
- You have more control than a REIT because you can choose the project, but have no direct control on a project.
If you are interested in learning more about crowd funding real estate projects, check out these companies:
How to invest in turn-key rental properties?
I own a turn-key rental property in Cleveland that I bought for $45,000 using my IRA and rents for $800 a month. The property was not very similar to my other rentals because it was a turn-key property, but I still would much rather have my money in real estate than the stock market. Turn-key rentals are properties that have been repaired, rented and have professional management in place. The idea is that an investor can buy the property, collect rent from day one, and have someone else worry about the management. There are many advantages to buying turn-key properties because you are buying actual real estate.
- You get great tax advantages.
- You can use a mortgage to help finance the property.
- You get long term cash flow, and hopefully appreciation.
- You can choose what properties to buy.
- You have control over the property management company if they do not perform.
Turn-key properties have much more control than investing in REITs or a crowdfunding, but they have some disadvantages as well. It is very tough to buy a turn-key property below market value, like I do with my rentals. The company that buys, repairs and rents the property wants to be rewarded for the work they put in. They do not want to sell the home for less than it is worth after doing all that work. That does not mean you can’t get a decent deal since many of the turn-key companies avoid using real estate agents and paying them a commission.
How to partner with someone on a real estate investment
Another way to invest in real estate is partnering with an active investor. Many flippers need a lot of cash to buy houses, repair them, and pay for all the carrying costs. Many flippers will use private money for part or all of their financing on flips. There is risk involved when flipping as well as risk for the investor who provides money for a flip as well. Depending on how the financing is structured, the person who provides money for a flip may get the house as collateral. That means if the flipper defaults on the loan, the lender could take the house through foreclosure. The investor gets paid points and interest on the money they loan the flipper. A typical rate may be 2 points and 10 percent interest. Here is an article with more money on investing private money with real estate investors.
In some partnerships the flipper and the investor may split the profits. A typical split would be 50 percent for the flipper who finds the house, gets the work done and sells the house. The investor who puts up all the money gets 50 percent as well.
Using a partner or financing real estate investments has its advantages and disadvantages:
- You have to have faith in the operator who you are investing with.
- You do not have to find deals, or do any work, but it is good to be in the loop and know what is going on.
- You need a large investment in most cases to be protected with a Deed of Trust (this uses the house as collateral).
There are many ways to invest in real estate. If you want to take full advantage of the tax benefits, buying below market value, cash flow, and long-term returns, you need to buy rentals yourself and be heavily involved. If you don’t have the time or do not want to spend the time to invest in rentals like I do, there are many other ways to invest. Remember you will be giving up control, many of the advantages of real estate and may not see as good of returns.