New to investing in real estate? Start here!
Are you asking yourself:
“How do I get started with investing in real estate?”
Are you needing a starting point to even find out if you are interested?
Then you’ve come to right article.
If you are like most people, your interface with real estate may be limited to just buying or renting a home. But since you found this site, by search or by referral, I assume you want to learn about investing in real estate. And since you are reading this article, you are likely unsure of how to get started. Not to worry, you are not alone. Most people getting started in investing in real estate are most curious about the risk/reward balance and how to get things rolling.
So let me try to break things down as best I can for you.
There are several key areas of knowledge I begin to address in this article that you need to begin to wrap your arms around:
- what are the different key investor roles in investing in RE
- what are the two primary return profiles of an investment
- how accessible will your funds be once you invest them
- what is your reward/risk comfort zone
- what asset types are there and how are they affected by various dynamics in life
- how do you assess the competency of a sponsor leading a deal
Key investor roles:
There are two types of roles in RE investing: active and passive.
Active means you are doing the work to make things progress in the asset which may be a number of various activities: you are coordinating contractors, managing properties, handling the project, collecting rents, finding tenants, etc. Those who put commercial investment opportunities together for syndication (meaning they need passive investors to put up funds) are called sponsors.
Passive means that once you have decided what to invest in, your activity becomes simply monitoring progress reports from the sponsor and collecting your distributions – “mailbox money” as some call it.
Primary return profiles:
There are two main types of return profiles: yield plays and value plays.
Yield plays are designed to generate steady cash flow (generally from day one or soon thereafter)- like from rents and RUBs.
Value plays are designed to generate growth in equity and may not produce cash flow for 9 months to a couple of years because it will take a while to either build or rehabilitate the property. But once they are stabilized the accumulate much larger value in equity due to new cash flows. Value plays can return much larger internal rates of return (IRR) than typical yield plays but you’ll have to wait for distributions.
Then there are hybrid plays – which is nothing more than a combination of both yield and value – so distributions start sooner but some significant value is still being built up in the deal.
Availability of your invested funds:
When deciding to invest in a deal, you must also consider how long your funds will be “unavailable” once they are placed in a deal.
Investing in real estate is not like the stock market where you can just “SELL” a stock and get your funds back within 3 business days.
Most real estate is a long term deal (with very few exceptions).
For syndicated deals, your capital funds will likely be out for 3, 5, or 10 years. But you will be receiving distributions that slowly return those funds over time while still building value for the long term. If the sponsor sees the right conditions for a cash-out refinance, then you may receive a good chunk of your capital returned in 2 to 5 years while you will continue to “own your share” of the property for the longer term. Cash-out refi-s are nice because it allows you to take those funds and invest in another deal while still owning the original one. And, those refi funds you receive are not taxable because they are “loan funds” – how sweet is that? If the sponsor determines that it is best to sell the asset, then you will get share of the investment at that time. It all depends on the market (interest rates, rental rates, economy stuff, etc.). It’s not uncommon for a deal to sell early if its value has increased significantly since it was purchased. If it has, then selling it will allow all your remaining investment and all its gains to be returned and placed in new deals.
But there are other forms of deals that may be better suited to new investors like yourself.
If you really don’t have a lot of funds, or the risk concerns you because of unfamiliarity in this domain, then “private lending” can be a nice way to get started. <link to private lending>
Investing in single-family can also be a smaller scale option. In the SF domain, there are several options: become a landlord and collect rent (a passive income), flip homes (buy fixer-uppers and resell them), or private lending to provide other flippers bridge loans or become a partner in flips as a passive lender. If this is your cup of tea, then schedule a time with me to chat and I’ll see what I can do to help you get started this way. I’ve done a variety of things in this domain and may be of help. This site, however, will stay focused on investing in commercial deals but I do have opportunities and connections that can get you started in SF investments.
As far as the risk/reward balance, this may take a while for you to arrive at knowing what your comfort zone is. Don’t rush it – it is your money you are putting out there.
Investing in anything requires one to do some homework in order to make wise decisions.
Not knowing how something works is reasonably the biggest reason to be timid and overly cautious. If you don’t know how something works, the evidence and understanding are paramount – and should be.
No investment can guarantee a specific return – there are just too many variables (and SEC rules) that make a promise in this area unwise. That said, however, good information and some education will go a long way to understanding the risks and rewards.
As for rewards, I’ve seen some deals not work out so great – but those are very few in my experience. I’ve also seen deals return IRRs of 20, 30, even 50% in two years (deep value plays). I’ve seen sponsors hit their 3-year performance expectations in 10 months. A lot has to do with the training and experience (track record) of the sponsors. Knowing your sponsor is key to knowing if you can trust them with your funds. That’s part of what this site is all about. We’re building a relationship here and we want our passive investors to thrive so they come back for another deal. We ain’t happy unless our passives are happy. We (as sponsors) can’t afford a bad deal any more than you can.
For risks, there are many – but there are means to mitigate them. For starters, we have to say “past performance is not a guarantee of future returns” – that’s a fact. Every deal is unique – period. Different sub-domains in the commercial real estate market are affected in different ways. COVID for example hit the retail a lot harder than multi-family units. Hotels got slaughtered for a while and are still suffering as of the writing of this article. Distribution systems however got a huge bump (Amazon for example). Anything dealing with working at home got a boost. The economy is a very dynamic beast (or friend). Different regions of the country were affected differently as well. Multi-family in Texas fared ok during COVID – economic occupancy on average was around 90% for the deals I’m in. That’s down from the desired 95% but still profitable. Quarterly distributions skipped a quarter but are back on track – even with the halt on evictions.
The bottom line is, investing in real estate is mostly a long-hold type thing. You can’t rush it. It has to grow.
If you want fast rewards, jump into the stock market. Problem is, the stock market is much more volatile and can lose a great deal because someone put out a bad article, or tweeted a misstatement, or because some huge fund decided to dump a stock that you investing directly in. If you find the stock market too risky for these reasons and more, then real estate may be better suited to your comfort zone. Yet, while it has a long history of delivering steady value, past performance is not a guarantee of future returns – disclaimer always applies in any investment.
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- Start learning – read read read – and ask us questions
- Get your funds into the right type of account.
- Review your financial situation and see what you have for real estate.
- Keep saving money for investment purposes
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- Consider starting with a smaller amount (minimum investment amounts may apply) and at least get through the subscription process.
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