Real estate is an incredible asset class to invest in. No more land is being created (unless you’re building islands off the coast of China), and everyone needs a place to call home.
The leverage opportunities in real estate are also unprecedented across all other types of investing (stocks, bonds, company shares, etc.). Where else can you bring 20% of the cost to the closing table and purchase 100% of an asset?
But with all the good, it’s still a big, scary, messy industry. Finding a point of entry can be difficult, and everyone knows horror stories of tenants from hell, businesses going bankrupt and being unable to pay their rent, and banks lending money to buyers who can’t afford the payments.
Even if you do find a niche that’s working well for you and making money, real estate requires a large time investment. And nobody wants to get midnight calls about the AC or water not working!
So how do you still invest in real estate without having to become a landlord, deal with midnight plumbing disasters, or worry if you’re purchasing a home in an area that’s going to appreciate long term?
What if I also told you that there was a way to enjoy many of the benefits of real estate without all the headache?
Enter an underground world of investing with incredible returns (well north of 10%), the ability to have freedom of time and not have to check on your property everyday, and have incredible security that your money is being protected by the hard asset of real estate!
Many individuals (even the very wealthy) don’t know how to get into this incredible investing space.
Here is your guidebook…
What I’m talking about is partnering with active real estate investors or developers and helping to fund their deals. This can be done through a few ways including:
- Investing your cash
- Leveraging your credit and relationship with banks
- Self directed IRA’s
- Helping bring groups of people together who can fund smaller portions of the project (syndicating deals)
- A local investment club
At first glance this proposition may sound interesting but also fraught with potential disaster! How do you know your investor is making a good investment? How are your funds protected against a down economy? What if the investor runs off with your money? Who regulates this sort of thing?
Here are the steps you need to get started:
Find Some Money
The first step is rounding up some capitol through any of the ways listed above. Most investors won’t except anything under a $50,000 minimum buy-in so I’d start with between that and $100k on a first deal. You want to “audition” your investor to make sure your goals align, you work well together, promises are kept, etc.
Select Class of Real Estate
Second, what type of real estate will you actually be investing in? This is important because this is the hard asset that will protect you from loss. If the project goes south what will be the exist strategy be to get your money back?
If you are investing in a single family rehab or rental there is a very large market for selling the property and turning your cash liquid again. An office complex or something be created for a niche market will potentially be more difficult.
If you are investing in a new development a great “mid-way” exist strategy is to be able to sell the land that has now been prepped for construction. Once property is divided up into lots and zoning and platting have taken place the value is increased.
Multi-family is also a good asset class for a passive investor. Most deals are structured so that you receive a portion of monthly rents to pay you money now, while the bulk of your investment is returned when the property is sold or refinanced. Money now plus money later, and no dealing with tenants!
Protecting Your Investment
How is your investment protected? The number one thing to check is how much is being borrowed based off how much the property will be worth when the project is completed. If you are lending up to 85% – 90% of the value a bad swing in the economy or mismanagement of the project could easily put you in the red.
A good rule of thumb is to not investment above 70% – 75% of the ARV (after repair or construction value). Have a licensed Realtor put a CMA (competitive market analysis) together. This will show you what the projected value is based off what the market is already doing.
Also, make sure you have an agreement with the investor as to what else is on the line if the project goes south. Does he/she have other properties they could sell to pay you back? (this is called a personal guarantee) You can also have the investor create a general business loan agreement with you that is tied to the entire company and not just one project.
Private Investment Returns
How much can you make? The good thing about private investing like this is you are able to build a personal relationship with your investor/developer. You know who they are as a person, you can judge their character and track record.
None of this is possible when you send your money to a large investment company or hedge fund. They don’t know or care who you are, and there will most likely be high management and transaction fees you are obligated to pay whether or not you make any money.
Also, it is very rare that you can find a company willing to offer you double digit returns on your money (10% or higher). This is relatively common in real estate development.
The two graphics below show the very dramatic difference of a 12% and a 4.5% interest rate over a 10 year period of time!
Your money increases almost 300% at 12% interest but by barely 50% at 4.5%. This difference will only become more dramatic the longer you invest.
How are you paid back? Usually real estate investment loans are for between a term of 12 – 24 months. You will receive quarterly interest payments and your principal becomes due at the end of the term.
Again, unlike some stocks you are able to draw some money out for living expenses while the project is being constructed.
Multiply Your Return
Become a source of financing. Once you have found an investor to partner with increase your returns by rounding up friends, colleagues or others in your sphere of influence and getting them to join you in your investing! For this service you can request a “finders fee” of a few “points” of the loan. (a point is equal to 1% of the total loan amount). You can also ask for a higher interest rate than the rest of your investing group. This is a VERY simple way to see your returns grow even faster!
Being a passive real estate investor isn’t for everyone; but when you factor in the amount of time, work, and effort it takes to actually manage or build a real estate portfolio this can be a great option for many who are willing to make a slightly lower return but have almost total freedom of time!
Your money is still involved in real estate and protected by a hard asset, and your returns are far and away better than 99% of what you will see available in the general stock market.
You can form a personal relationship with someone who actually cares and respects you and your money and who’s success is directly tied to being responsible with your investment.
You are now privy to some very exclusive information; the vast majority of people don’t have any clue about the world of private real estate finance. Start getting connected, find some investors, and retire early through helping fund real estate deals; and you’re also guaranteed to not have any midnight calls because someone’s toilet overflowed!