When the stock market is doing well, not too many people talk about real estate investing.
It makes sense though – the stock market is easier.
You buy some shares, you sell some shares, and you record the gains and losses on your return. It’s even easier if you stick to a three fund portfolio or invest in a retirement account – a lot less paperwork!
Real estate is a little trickier. Buying and selling property requires intermediaries and takes more than the few seconds it takes for a stock trade.
What if you have too much invested in the stock market or you simply want another asset class? What if you think the market is overvalued and you want a hedge? And if not a hedge, just another option?
Real estate is a great alternative investment that isn’t weird (like burial plots, which are technically real estate too!).
But getting into physical property can be a challenge and very scary. Even if you go the FHA route and only put down 3%, it’s still a relatively large capital outlay to get started. And there’s quite a bit of hustle and leg work involved, on top of committing capital.
But there are ways to get your foot in the door without huge cash investment.
Let’s take a look.
Table of Contents
Wholesaling Real Estate
I first learned about wholesaling real estate from Alex Martinez on the Opt Out Life podcast. The podcast is a fascinating listen of his short career arc but Alex Martinez got his start wholesaling property. That’s when you get a property under contract and then sell the rights to another investor, who takes over from there. The investor does the renovations and then sells it or rents it for cash flow. You get paid for the contract. His first wholesale deal netted him $22,000 for about 8 hours of work.
The 8 hours is a bit deceptive because there’s a lot more work that goes into it. There’s a lot of time spent looking for properties, networking with investors, finding properties that don’t work out, negotiating contracts that don’t work out, etc. So there’s a bit of overhead involved that doesn’t necessarily get factored in but there isn’t a lot of financial overhead.
The financial outlay would be in any earnest money required on the contract. When you sign, you’re agreeing to purchase the property at a future date. You can sometimes avoid this if you secure an investor within a few days, but that’s state specific. You probably want to have investors lined up and know what they need in a deal.
(this is also sometimes called real estate bird dogging, or that you’re a real estate bird dog – this post on BiggerPockets goes into greater detail)
The true appeal of this is as a stepping stone. You can learn a lot about the real estate business by becoming a wholesaler or bird dog. You are removing much of the leg-work involved in sourcing deals so investors are likely to try to help you learn more about the business. The better you are at estimating renovation costs, the better you are to the investor. If you want to do this, I really suggest you invest the hour or so to listen to that podcast because Nate and Dana (the hosts) are also real estate investors (to a degree) and they ask some good questions.
Tax Liens
As Ben Franklin once said, “… but in this world nothing can be said to be certain, except death and taxes.”
For real estate, there is one certainty – property taxes. Some states don’t have income tax, some states don’t have sales tax, but I don’t know a single state without property taxes.
And when people don’t pay their property tax bill, the state or county government puts a tax lien on the property. Then, as governments tend to do, auctions off that lien because it needs the tax revenue. The person who buys the lien is guaranteed an interest rate, based on local and state laws, on that investment.
If the property owner does not pay up within the allotted time, the owner of the tax lien can foreclose on the property and is in line ahead of everyone, including mortgages. In many cases, the banks will pay off the lien because they don’t want to lose the house.
I went to a tax lien auction once and it was a pretty casual affair. Just a bunch of folks milling around the front steps of the county courthouse. Most were on phones with their investors but it was a pretty casual bidding process, less exciting than one of those staged storage facility auctions you see on TV.
I’ve covered investing in tax liens before, when talking about low risk short term investments too if you want to read more.
Crowdfunded Real Estate
Crowdfunded real estate is a relatively new option made available by the JOBS Act. The JOBS Act, which stands for Jumpstart Our Business Startups Act, allows companies to raise funds through crowdfunding. In the case of real estate, this means a company can raise funds for a deal through the crowdfunded platforms and individual investors like you and me. There are still some rules to follow, like the number of shareholders, but this increases how many folks can become involved and how they can be solicited.
If you’re an accredited investor, you can invest in individual properties. These often have a minimum greater than $1,000 but many are available if you can commit at least $5,000 per deal. I share a list of the best crowdfunded real estate platforms.
If you are not an accredited investor, you can invest in an “eREIT” that picks individual properties to invest in. Here is a list of the best CRE platforms for non-accredited investors, of which my favorites are Fundrise and stREITwise (full review here). More on those two below when I discuss REITs.
Real Estate Investment Trusts (REITs)
This is probably the most boring way to invest in real estate. 🙂
It’s to invest in a REIT or REIT Fund, like the Vanguard REIT (VGSLX). You’re investing in companies that invest in real estate. Many REITs invest in public storage or commercial real estate, like corporate parks, so your investment is very much concentrated in a specific real estate asset class.
You can also turn to some private REITs available on platforms like Fundrise and stREITwise. They offer a little more variety in the real estate asset class.
For example, on stREITwise you can invest in commercial real estate with just $5,000 minimums. They have a transparent fee structure and have been paying 8-9% dividends since inception. Their offerings are very focused and you know exactly what you’re getting into. This is available for all investors.
Hard Money Loans
A hard money loan is a loan that you make to a real estate investor with a piece of property as collateral. It’s structured as a note, meaning the investor is in fact a borrower and you are not “invested” in the property per se. You and the borrower agree to the terms of the loan (interest rate, length of note, payments, etc.).
I’ve only ever done this once, with someone I knew and trusted, and so far it’s worked out well. Interest rates are typically in the 11-12% (higher if riskier, lower is safer) but I’m not the best person to ask when it comes to vetting offers and finding them. I want to include this option since it is available.
Remember, you aren’t investing in property, you’re lending money to an investor who will pay you a fixed rate of return. It is, however, some exposure to real estate.
Once you get a few of these deals under your belt, you may have enough to start dabbling in real estate syndication deals. It’s where you are part of a group that makes an investment. There are higher capital requirements, not as low as crowdfunding sites, but there are more attractive deals.
DNN says
I’ve always heard about buying foreclosed lists and HUD information, but was uncertain and felt those were scams. What’s your take on that, Jim? Is list buying really worth it?
I don’t know much about it but it sounds like it gives you a slight head start? Are those lists available from the local government for free? I think more research is required.