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In order to distill the best real estate investing strategy, it is important to first define what your goals are. Quick money, long-term cashflow, appreciation mainly or appreciation and cashflow (our goal).
Next, what is your target return? Cash on cash of 7%-10% and higher for smaller properties.
Speculation – Solely Appreciation: Higher than average chance of losing your initial investment and wildly volatile returns. If there is a pullback, you run the risk of losing a portion of your investment.
Flipping Houses: Purchasing distressed properties, renovating and reselling. You are building value in the property but the financing is expensive and very short-term. Need to be able to manage people. Transactional.
Wholesaling Properties: Finding distressed properties, putting under contract and selling/assigning the contracts. Not really investing; need to be a great marketer and may need to be licensed. Transactional.
Longer-Term Investments
Real Estate Investment Trusts (REITs): Diversification, low valuations, consistent rental yields. All can be obtained by allocating capital into a small basket of firms that own and manage investment properties for the sole purpose of generating profits. These can be purchased just like any stock via an investment account. Completely passive.
Return: REITs have outperformed the S&P 500 over the past 20-year and 30-year periods, respectively.
Real Estate Investment Partnerships/Syndications/Joint Ventures: A real estate investment partnership is made up of individual investors who pool their money together to invest in real estate. The operators are general partners and the investors are limited partners (passive investors).
Syndication has active and passive investors and joint ventures have only active investors. Need to perform due diligence just like with any other investment. Can be completely passive.
● What has been the historical annual return of the operator’s properties?
● Remember when reviewing past returns; they are not a prediction of future performance
● Make note of where the real estate market is now and where it was when the group started investing – how much of the returns they are showing you is strictly from the market, inflation and how much is because of their operations? When there is a pull back; returns will be generated by good operators.
Real Estate Crowdfunding Platforms: While a relatively newer phenomena, real estate crowdfunding has now been around since 2012, after the JOBS Act was passed that allowed crowdfunding to be used as a way for private companies and private investment projects to raise money from the public. Completely passive.
Return: Fundrise has delivered a compound annual rate of return of 11.49% (Financial Samurai.com) across all their deals since 2013. This is good but I have earned more than twice this in passive syndication investments I have made over the same period.
Active Long-term Investing: Purchasing mainly single family and multifamily properties. Active investing but able to be semi-passive investing.
Turn key investing for properties that have already been renovated and just need to be rented out.
Value-add investing for an investor that wants to do work but wants to build value/equity initially. Risk vs. reward investing.
Less units = more volatility.
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What question do you always wish I would ask but I never do?
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