I've written often about the hassles of being a landlord in the real estate business. The so called "plugged toilets in the middle of the night" hassles. Here I want to share with you a few simple ideas about how you can invest in real estate without those hassles.
The biggest difference between being a landlord and other real estate investment strategies is both the time you put in and your financial exposure. As a landlord, everything about the rental property falls on your shoulders. Even if you hire a professional property management company, ultimately all of the responsibility is yours.
Real estate investment groups can be described as self-created mutual funds for real estate investing. Typically, a real estate investment group grows out of a real estate investment club. According to a private club consulting expert, there are many different types of real estate clubs. Therefore, you need to understand the objective of a club before joining. Some are education and networking clubs that bring people together to create opportunities to make deals through networking and they educate members by bringing in speakers.
Other real estate investment groups form for the purpose of financially working together as a group. Still, these have several variations. Some just create the opportunity for members to join up in multiple teams to jointly own real estate. Others require all members to contribute financially to a club fund and then the club votes on what investments to make as a whole.
What makes this a simple way to invest is that you are not alone. You have group knowledge and group experience to find the best deals. Almost always, professional property managers are used to manage the property. You may be asked to dismiss a property manager for poor performance but you'll never likely have to assume any management responsibilities yourself. Also, your financial exposure is limited to your investment. If the property is performing poorly financially, it's much easier to just walk away without throwing good money after bad money. When you're the sole owner, walking away is much more difficult to do.
Real estate has had value ever since man found a way to settle down to farm it. It was inevitable that Wall Street found a way to commoditize it. Real estate investment trusts (REIT) are publically owned trusts that trade shares on all of the major stock exchanges. They combine investors' money to purchase real estate with hundreds of millions of dollars (today it's in the billions in some cases). These are the institutional investors that I have written about driving the current real estate market in many local markets.
Because they are trusts instead of corporations, they are required to pay out 90% of the taxable profits each year as dividends to shareholders. However, there are a few reasons that going with a private investment group can make more sense than an REIT. For one, just like any corporation, REITs are very savvy about lowering their taxable income so that they can retain more of the profits. That means less dividends to shareholders. Another major deterrent for REITs are operating expenses. The operating expenses also eat into dividends. There are layers of management and multiple departments managing commercial and residential properties and even specialized groups managing properties in different parts of the country. These expenses take a big hit on the bottom line before investors are paid. Finally, REITs almost certainly have overpriced shares selling on the stock exchanges today. When REITs started heavily buying into real estate at the bottom of the market, knowledgeable investors bid the share prices up. Now, these investors recognize the shares are overpriced and are selling at the top of the market.
Another type of institutional investment is through hedge funds. However, these are out of reach for most investors. Hedge funds combine the money of wealthy people into large institutional real estate invest funds. Shares for hedge funds are not generally sold on Wall Street. There is a minimum amount of money that investors are required to invest to get into a hedge fund. Often it's in the ten million dollar range. In fact, many states have regulations that require hedge fund investors have a minimum self-worth before they can buy in.
When you are looking for ways to invest in real estate, be sure that you consider all of your options.
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