Being a landlord is a great way to invest in real estate but it comes with a lot of hands-on work that not everyone wants to deal with. One hassle is the so-called "plugged toilet in the middle of the night.” But there are several other simple ways you can invest in real estate without being a landlord.
The biggest difference between being a landlord and other 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. Often, a real estate investment group grows out of a real estate investment club. But not all real estate clubs are the same. You need to understand the objective of a club before joining. Some are educational and networking clubs that bring people together to create opportunities to make deals through networking. These are best if you are looking for new deals and when you want to stay current on investing strategies and the real estate business environment.
Other real estate investment groups are formed primarily 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 group investing a simple way to invest is that you are not alone. You have group knowledge along with the group’s network and experience to find the best deals. You can get into investments that are more profitable by sharing the capital costs for multi-unit apartment buildings. Almost all groups have professional property managers overseeing the property (which keeps you out of the landlord business). You may be asked to replace a property manager for poor performance but you’re not likely to 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 get out from under the burden 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 humans began farming 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 the major stock exchanges. They combine investors' money to make real estate investments worth hundreds of millions and even billions of dollars. These institutional forces have the resources to not only stay on top of current market dynamics but also the financial clout to create and alter markets.
Because they are trusts instead of corporations, they are required to pay out 90% of the taxable income each year as dividends to shareholders. However, there are reasons that going with a private investment group can make more sense than a REIT. For one, just like a 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 is 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 or internationally. These expenses take a big hit on the bottom line before investors are paid. Finally, REITs may 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. With the possibility of a recession looming, some investors think shares are overpriced and now is the time to sell 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 investment 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, states have regulations requiring hedge fund investors to have a minimum self-worth before they can buy-in.
What are your preferred investing methods? Please leave a comment.
Also, our weekly Ask Brian column welcomes questions from readers of all experience levels with residential real estate. Please email your questions, inquiries, or article ideas to [email protected].