Ask Brian is a weekly column by Real Estate Expert Brian Kline. If you have questions on real estate investing, DIY, home buying/selling, or other housing inquiries please email your questions to [email protected].
Question from Amalda in PA: Hi Brian, I’m not yet a real estate investor but it does interest me and I’m thinking about giving it a go. I do believe that real estate has created more millionaires than any other type of investing. I work full-time as a flight attendant which keeps me out of town a lot. For that reason, I don’t think being a landlord is a good idea for me. What are some other types of real estate investing that I should consider to get started that won’t require me to be a landlord?
Answer: Hello Amalda. Great question. Getting started as a real estate investor can be tough for several reasons. Usually, it’s a lack of investment capital but you present a different issue with the fact that you can’t be as hands-on the way many investors are. But that doesn’t mean you can’t reap the financial rewards in other ways as a real estate investor. What follows is a short list of alternative ways that you might invest without being the actual owner of the property or a landlord.
Tax lien investing. This can be a good entry point for beginners, but it does take some capital to get started. The rewards can be either a high rate of interest on your money or taking ownership of the property. A tax lien is a legal claim applied to a property when the owner fails to pay required property taxes to the government (usually the county government). Tax liens total the amount of outstanding taxes, plus interest or additional fees accumulated by the property owner. Generally, the property owner cannot sell or refinance the property until the back taxes are paid (sometimes as part of closing the property sale).
Tax lien investing involves you paying the back taxes on someone else’s property to the county government. You then have the same rights as the government to collect the back taxes plus interest and fees. This is generally considered a low-cost investment because taxes are only a fraction of the value of the property – if you do your research to understand what the property is worth. The interest rate that you earn can easily be 12% and in some cases as high as 18%. If the property owner fails to pay you the back taxes plus interest within a specified period of time, you could end up owning the property. You can then sell it, rent it, or do what you want with it. Amalda, you’ll want to research this option beyond this brief explanation. Because this happens at the county level there are a lot of variables that you need to understand. One of the more important variables is how long the property owner has to repay the taxes. It can be as short as 2 years or as long as 12 years or more. You might not see a nickel of return on your investment during those years. It’s vitally important that you learn the local laws before you place a bid at a tax lien auction.
Mortgage note investing. This can be a terrific way to earn significant profits from real estate without owning the property. There are many different strategies but one of the basics is holding the mortgage on someone else’s home. As an individual, you act like a bank that would normally hold the mortgage. Another way you might think of this is similar to seller-financing (except you are on the title as a lien holder rather than as the owner). This does take substantial capital because the mortgage note could be $400,000 or more (or much less). You will need a good solid contract in the same way a bank lender would. Among other things, this would include an appraisal to be sure the property is worth the amount you are lending to the homebuyer. Typically, these notes are not for a full 30 years. Instead, they are for 5, 10, 15, or 20 years. You could also look for short-term mortgages such as for another investor that rehabs to flip houses. There are secondary markets where you can buy and sell these notes. Just be sure to do your research before jumping into this type of real estate investing.
Sandwich lease with an option to purchase. This is one of the lowest-cost ways that I know of to get into real estate investing without owning the property. A sandwich lease is a double lease with you in the middle between the seller and a tenant buyer. You lease the house from the seller with an option to purchase the house but not a requirement to purchase the house. You then find a buyer that is close to being able to qualify for a mortgage to buy the house but needs a little more time to clean up their credit score and/or save the down payment. You put a second lease with an option to purchase in place with the tenant-buyer. There is a substantial purchase option fee involved because it gives the tenant-buyer the exclusive right to buy the house within a specific amount of time (typically 1 to 3 years). You immediately collect the purchase option fee from the tenant-buyer. During the 1 to 3 years, you also collect a higher rent from the tenant-buyer than you pay to the seller. When the tenant-buyer completes the purchase, you collect another large amount because you sell the house to them for more than you agree to pay the seller. Again, you need to do your research because there are multiple contracts involved.
Amalda, those are only a few examples of how you can become a real estate investor without owning any property. A few others without elaborating are syndicated deals, wholesaling to other investors, and crowdfunding with other investors. With all of that said, there has to be a big word of caution here. Real estate can be a large and expensive undertaking - as the housing market crash of 2008 showed. It's never a sure thing. When it comes to real estate investing for beginners, it's wise to proceed with caution. You don't want to stretch your finances too far before you're ready and end up with debt that you struggle to repay.
What ideas can you share about real estate investing without owning property? Our weekly Ask Brian column welcomes questions from readers of all experience levels with residential real estate. Please email your questions or inquiries to [email protected].