4 ways to invest in real estate without being a landlord
Note that the information provided herein should not be considered financial advice. I am not an accountant, and recommend seeking professional guidance specific to your personal circumstances.
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Many people fall in love with the allure of real estate investing. It’s sexy, glamorous, easy! It sets the scene for many reality TV shows. However, we’ve all heard the nightmare stories from a friend or family member on why real estate investing was not for them. Some fear the interactions with bad tenants. For others, it’s the late night service calls. Is it really worth it all? What if, you could reap all of the rewards of real estate investing, with none of the downsides of being a landlord?
There are many ways to invest in real estate without having to deal with the stress of being a landlord. It can be as simple as hiring a property manager, to partnering with others through Joint Ventures, lending money privately, participating in syndications, or even contributing to REITs.
Each option has its own set of advantages and disadvantages to consider. Some provide incredible diversification of risk. Some offer very predictable income potential. Some are more active than others. However, all require you to do your diligence to understand the particular risks and potential rewards involved. Read on to find out which might be right for you.
Joint Venture Partnerships
Joint Venture partnerships (JVs) allow two parties to legally share an investment property. One party is typically responsible for the upfront capital and holding the mortgage, and the other manages the acquisition and ongoing management. A legal contract is drafted outlining specific roles and responsibilities, how returns are paid out, and how either party can exit the deal afterwards. Profits can be split 50/50, or at any ratio that is agreed to by the partners.
JVs are extremely common in real estate investing as it can allow experienced investors the capital they require to scale their business. For passive investors, JVs open up a new world of investment opportunity that they would not otherwise have the time or skillset to acquire and manage. However, JVs do come with certain risks. In my opinion, the largest risk is that you are placing your trust in one person to manage your investment money, and hopefully, generate a return for you. Additionally, your goals must be very clearly aligned with your partner. For example, what happens if one person fears the market is going to crash and one thinks it is still going to rise? Do you agree, and have provisions in the contract on how to exit the deal for each party? How often are returns paid out, and is it explicitly stated? No matter the answers to these questions, you will want to align with your partner on them. You will also want to be sure that you are working with an experienced lawyer to help craft the contract such that it protects you, your investment, and even your business relationship in these circumstances and more.
| Joint Venture Pros | Joint Venture Cons |
|---|---|
| > Can invest with friends, family or pre-existing business colleagues | > Must choose your partner carefully as you are establishing a working relationship that will likely last several years |
| > Invest with zero real estate experience | > If you do not have clear alignment on goals, conflict regarding strategy could arise |
| > After financing the deal, it becomes completely passive | > Success is determined on how well a single deal is managed, returns not guaranteed |
Private Money Lending
Private money lending is where an individual lends their capital to a real estate investor, with agreed upon interest and payment terms. The money provider benefits from a guaranteed interest rate that typically will beat returns on the open stock market. You can typically expect a 10-15% interest rate on your money. The real estate investor benefits from gaining the capital they need to renovate or develop a property, without having to rely on a traditional bank (for small non-institutional investors, the banks tend to limit their ability to access credit at a certain point). The right loan structure can create a win-win scenario for both parties.
However, there are still some risks. For the money provider, there is always the risk that the real estate investor will default on the loan. To mitigate this, ensure that you are working with a partner you trust, and one that has a proven track record. Also, consider how financially secure that your partner is. Do they have other income streams outside of this investment? Do they have good credit? The answers to these questions will help you understand the likelihood that they will be able to repay the loan.
| Private Lending Pros | Private Lending Cons |
|---|---|
| > Rate of return is locked in and set at a relatively high interest rate | > Risk of the real estate investor defaulting on loan (you are the bank) |
| > Success not dependent upon a single property | > Can be challenging to find a partner that you trust |
| > The exit strategy is clearly defined with a typically short timeline | > You do not directly own the real estate |
Syndications
Think of Syndications like very large Joint Venture deals. They are typically reserved for Accredited Investors (net work of more than $1M or annual salary <$200k individual / $300k combined with spouses), and involve several investors to acquire large real estate properties. Syndications allow multiple investors to pool their collective investment funds to acquire real estate assets that they would not otherwise be able to afford on their own. Some examples include large apartment complexes, mobile home parks, self storage complexes, or even resorts. As an investor, you typically act as a limited partner, where you provide capital but are not involved in the acquisition or management of the asset. It is a truly passive investment.
If you are accredited and can access these deals, they can be extremely lucrative. It is not uncommon to see returns significantly higher than you could see in more common stock market based funds. Of course, at this level the returns are not guaranteed. It is extremely important to work with a syndication group that you trust, and have a proven successful track record.
| Syndication Pros | Syndication Cons |
|---|---|
| > You gain access to large deals that you could never have accessed on your own | > The investment is somewhat more removed, as it is larger and spread across many investors |
| > Often working with some of the most experienced investors that can prove a strong history of success | > Must do your diligence to ensure you are working with a syndication group that has proven experience, and that you trust |
REITs
A Real Estate Investment Trust is a company that invests in real estate. REITs allow investors to purchase shares of the company, which allows the company to raise capital for many investments. This is similar to a Syndication, however instead of a single property investment, you would own a portion of many investments that the REIT is involved in.
As the investor, you earn income from dividends. The share structure allows you to quickly and easily buy and sell shares at market value, which is a significant benefit compared to some longer term types of real estate investing. Furthermore, many REITs operate on public stock exchanges making that process even easier. However, you are much further removed from the real estate investing experience. You would receive reporting on the success of the trust across all of its properties, and not necessarily be privy to the happenings of any single property. For some, they may appreciate the arms-length view to real estate investing. Others may wish to be more “in the game”.
| REIT Pros | REIT Cons | |
|---|---|---|
| > Share structure provides a very liquid investment vehicle | > Quite removed from the inner workings of real estate investing | |
| > Completely hands-off | > A larger trust is influenced to a much greater degree by the overall market | |
| > Your investment is diversified across many properties | > Diversification limits both the lows and the highs of investing |
Summary
There are many ways to invest in real estate without ever receiving a late night tenant call, lifting a hammer, or fixing an ever-dreaded toilet. It is important to remember that there are benefits and drawbacks to each investment vehicle, and it is up to you to decide where these factors fit in with your risk tolerance and investment strategies. As a hands-on investor myself, I appreciate that being a landlord it is not for everyone and am incredibly appreciative of those who are willing to place their trust and money in the hands of a real estate investor.
No matter which strategy is right for you, I recommend that you do your diligence. Understand the risks involved, and more importantly, the people that you are placing your money in the trust and care of. Do background checks, verify references and their history, and make sure that your goals and values are in alignment.
Which of these investment vehicles do you personally like the best? Why? Which ones are just not for you? Leave a comment and let me know!