As you probably know, I have been a real estate investor for just about a decade.
I bought my places in Grand Rapids, Michigan in 2012-13. Doing so was the combination of the right time to buy (there was still blood in the water from the financial and real estate meltdown) along with a great market (very affordable.)
When I tell people today that I bought 14 doors (3 properties, five buildings) and fixed them up (fairly nicely) for $600k, they can’t believe it. For perspective, the 3,500 square foot house I currently live in would go for about $600k. Times have changed for sure.
These properties really solidified my financial independence at age 42 though I didn’t realize it for many years later (eventually retiring at 52). Ahhhhh, the lost decade. Ugh.
They also helped grow my wealth tremendously, providing $50k (my worst year) to $85k (my best year) in income after expenses. And while I made mistakes along the way, getting into real estate investing was one of the best money moves I’ve ever made.
However, over time and after several personnel changes, my management company became quite a handful to manage. Going through their financial reports and asking questions about decisions they made (then usually arguing over them) was the worst part of my month by far. So I sold all my properties last summer and invested most of the proceeds in real estate syndication deals. It’s still real estate investing but totally passive, which is what I want at this stage in my life.
One of my friends, Jeff from Debt Free Doctor, has become an expert in real estate syndication investing. You may remember him from several guest posts he’s done here including How to Get Started Investing in Real Estate Syndications.
I recently asked Jeff if he would write a post about the various ways to invest in real estate, listing pros and cons of each option. And that’s the post that follows.
So with that said, take it away, Jeff…
After practicing dentistry for 10 years, a minor wrist injury while snow skiing forced me to “rethink” my retirement strategy.
At that time, I was on the “path to accumulation” via the 401k method. This is what we’re most familiar with and frankly back then was all I knew.
This “wake up” call made me realize that I was operating our finances on a hope and prayer that I’d be able to use both hands to dig around in people’s mouths for the next 30+ years.
I’m all about mitigating risk whenever I can but up until this point:
- I only had one income source (active income)
- I invested 99% in the market via index funds
It didn’t take long, after researching for a few days, to understand why the wealthy are rich:
- Over 90% of U.S. millionaires have real estate in their portfolio
- Majority of millionaires average 3-7 income streams
Back then, Dr. Jeff had ONE income stream and the only real estate was the primary residence in which no rental income was coming through the door. Not good.
I decided to take my finances more seriously and began focusing on developing extra income streams from real estate but like most people, didn’t have a clue where to begin.
With sky-high inflation and the stock market all over the place, I can’t think of a better time to discuss the 10 ways that you can invest in real estate for retirement.
Where It All Began
The common thread among most successful real estate investors is that they started with a mindset shift after reading Robert Kiyosaki’s book, Rich Dad Poor Dad.
His book forced me to start thinking differently about HOW money is made.
A Tale of Two Dads
In the book, Kiyosaki explains how his “two dads” taught him about money while growing up.
His “poor dad” or biological dad had a PhD and was a college professor. On the other hand, his “rich dad” was his best friend’s father who happened to be a very successful businessman yet lacked a high school degree.
His “poor dad” earned a steady income, but like many educated people still struggled with debt and money.
Kiyosaki’s “rich dad” was one of the wealthiest people in Hawaii at that time and he noticed several fundamental differences from both father figures.
In his book he states, “I noticed that my poor dad was poor, not because of the amount of money he earned, which was significant, but because of his thoughts and actions.“
A scarcity mindset limits your finances your entire career no matter your income.
It’s NOT How Much You Make that Matters
I was ALWAYS focused on growing my income no matter what it took (working longer hours, extra days, etc.). Instead, Kiyosaki states that HOW you make money is MORE important than how much you make.
For example, Dentist A is 40 years old and works 5 days a week. He makes $250k/year drilling on teeth and nets $165k/year after taxes. He has only ONE income source.
Dentist P is 38 years old and works 3 days/week. He makes $150k/year at his practice and nets $100k/year but has also grown his passive income to $70k/year. He has multiple streams of income within that passive income stream and plans to be at the point where he’s work optional in 5-7 years.
Dentist P already makes more per year that Dentist A and will retire 20 years earlier because of working SMARTER (focusing on HOW he makes $$) versus only trying to acquire MORE patients.
See the difference?
I get that most investment portfolios are invested in the stock market. But if you’re looking to diversify your portfolio with “hard assets” then it’s hard to beat real estate.
Many people consider real estate to be safer than investing in stocks due to the volatility. This is because traditional real estate investing provides more stability than the stock market does.
How? When you invest in a self storage facility or apartment complex, you don’t have to worry about the value going up and down each month. This is due to the consistent cash flow and property appreciation that happens over time (no matter what the market does).
Although there are many ways to invest in real estate, this article will focus on the top 10 ways you can get started in real estate.
10 Ways To Invest In Real Estate For Retirement
#1. Real Estate Investment Trusts (REITs)
A REIT is a real estate investment trust and can either be public or private. When investing, you’re buying stock in a company that owns, operates or finances income-producing real estate.
Publicly traded shares of REITS can be purchased (and sold) on major stock exchanges whereas privately traded REITs are available only to accredited investors.
REIT examples include:
- self storage units
- office buildings
- retail centers
#2. Turnkey Rental Property
An easy way for the beginner real estate investor to start passively investing is via turnkey rentals.
This is becoming one of the more popular buy-and-hold strategies as you can get started using companies that seek and find undervalued property in strong rental markets.
Their goal is to renovate these properties and sell as “move-in” ready for the passive investor. This removes investors from having to oversee the renovation process.
Most turnkey real estate companies provide other services such as:
- marketing for tenants
Typically, investors can realize a cash return the day a property closes because they’re managed professionally.
On the downside, there’s a potential for a short-term negative cash flow while the property is turned from one tenant to the next.
#3. Fix and Flip
The fix and flip industry was made extremely popular by the HGTV hit show, Flip or Flop.
The show highlights two former realtors that turn into professional flippers. In each episode, they instruct viewers on how to execute successful fix and flips.
The good news is if you’re thinking of a creative way of investing in real estate, then this might be of interest to you. Fix and flip is the process where you’d buy a distressed property, fix it up and then flip or sell it.
As a busy professional myself, I stay away from active investing in real estate. Instead, I invest 100% in passive deals (more about that later). But there are some people that get excited about finding great deals that they know can be made profitable with a little TLC.’
By finding lower priced deals, your investment will typically cover the down payment (usually 20% of the purchase price) along with some of repair costs and closing costs.
An easy way house flippers can determine the maximum price they should pay for rental properties to turn a profit is by using the 70% rule.
This rule states that an investor should pay 70% of the After Repair Value (ARV) of a property, minus the cost of repairs and improvements.
The JOBS Act of 2012 opened the door for many small businesses (including real estate companies) to raise money through public crowdfunding.
Private equity real estate investing used to belong solely to the super-rich and well-connected. But crowdfunding has now allowed the average investor to participate in real estate in a way that was impossible before.
Online crowdfunding platforms are for those who want to join others in investing in a bigger commercial or residential deal.
With these investments, fund managers pool your money to buy property. The profits from renovating, operating and eventually selling the real estate get divided among the investors.
There are usually two pieces with this type of investing:
- a dividend (paid out quarterly or annually from operating cash flow)
- equity growth (from appreciation, reflected in the share price)
- Can invest in single projects or portfolio of projects
- Geographic diversification
- Investments are illiquid
- Management fees
There are hundreds of real estate crowdfunding platforms, and I got my start passively investing in a handful of them. I also lost $50k in a deal where looking back, I had no business investing in the first place.
Related article: RealtyShares – What I Learned From Losing $50,000
This failure allowed me to take a step back, understand my mistakes, and then move forward armed with the education I needed to mitigate risks while investing.
(As a side note, I no longer invest with these platforms. I now only invest in deals where I can personally meet the sponsors of each project and tour the properties with them).
#5. Hard Money Lending
If you have excess cash in hand, then you can “become the bank” and lend money to house flippers or landlords who need to do serious work to a property before they can get a typical bank loan.
A hard money loan is generally a short term (one year or less) loan issued on a property during the renovation phase.
For example, a friend of mine loaned money to an investor who bought a house intending to do a complete renovation and then reselling the property. He earned 12% interest plus 2 points (a point is an up-front fee of 1% of the value of the loan). He loaned a total of 75% of the after repaired value (ARV), and the real estate itself secured it.
By using conservative numbers and using the physical real estate as collateral, you reduce your risk.
#6. Become a “Money Partner”
Many people want to start investing in real estate but have little to no money to do it by themselves. Even if a bank loans you 80%, coming up with the other 20% plus any budgeted renovations can easily set you back $20,000 – $50,000.
Like hard money lending, becoming a money partner means you’re bringing cash for the deal and the other party is bringing the deal (along with managing the renovation or operation of the property).
But instead of offering them a loan at a set interest rate, you become an equity partner with them and will make a certain percentage of the total profit at the end of the day.
For example, maybe someone doing a fix and flip acquires a hard money loan to cover 70% of the total costs of purchase and renovation but still needs the other 30%. That’s where you come in. In exchange for providing the remaining 30% of funds, you’ll get a certain percentage of the profits when the house is renovated and sold (it’s common to split profit 50/50).
Wholesaling is the process of going out and looking for good deals on properties, placing them under contract, then selling that contract to another investor for a fee.
To be clear, wholesaling is far from passive. You’re acting as the “middleman” and must be willing to put in the work to find good deals.
In these situations, either the house itself is in distress – it needs too much work to sell through normal channels – or something is going on in the owner’s life that they need to sell quickly for cash. Perhaps they’re facing foreclosure or are behind on their taxes.
#8. Buy a Rental Property
If you want to be actively involved in real estate, then purchasing homes and renting them out is a great way to produce extra monthly cash flow.
To do this, you must buy a home that has a combined monthly mortgage payment, home insurance payment, and property tax payment lower than the rent the property commands.
There are several ways to do this – from buying in an area with high rents, to putting a lot of money down so that your mortgage payment is low.
There are two downsides to directly owing rental property:
- It typically requires a lot of cash up front – from the down payment to the maintenance required. You should assess whether your return on investment will be worth it.
- The second major downside of real estate is dealing with tenants. You’ll need to screen renters before they move in. If you’re the type to easily give in to people, you may be better off letting a property management service oversee your rental properties. Either way, there is ongoing work required.
Depending on who you talk to, rental properties can be very lucrative. And, if you do the upfront work of finding those hidden gems, you can let a property management service do the rest and rental properties can be a form of semi passive income
#9. Real Estate Syndications
By far, syndications are my favorite real estate investment as it allows me to be a hands-off investor.
A real estate syndication is a way multiple investors can pool funds together to purchase an existing property or build a new one.
They provide investment opportunities to passive investors and contribute to creating passive income.
To learn more about the process, check out this video:
Syndications are governed by the Securities and Exchange Commission (SEC) and must file documentation (i.e., private placement memorandum) with and report to them.
Originally these types of investment property were exclusive to the very wealthy but now are much more accessible to the accredited investor.
Who’s Involved in Syndications?
There are two groups of partners involved:
#1. General Partner (GPs)
They are also known as the sponsor and typically:
- find and underwrite property
- perform inspections
- run the numbers
- arranging the financing
- manage the asset
#2. Limited Partner (LPs)
This group consists of passive investors with limited risk. They offer their capital in return for a share of the cash flow and profits from the property.
They are NOT actively involved in managing the property.
They simply sit back and collect distributions (mailbox money) every quarter during the hold period (typically 5-6 years).
#10. Real Estate Funds
It’s likely you’re familiar with investment funds such as:
- money market funds
- mutual funds
- hedge funds
These are a pool of capital that’s been aggregated on behalf of multiple investors. A real estate investment fund is one that’s exclusively focused on investing in income-generating property.
Typically, these funds are led by a sponsor that invest the combined capital into properties as one actively managed portfolio.
Real estate funds are broken down into two categories:
- closed-end funds
- open-end fund
Closed-end Real Estate Funds
A closed end fund has a manager that sets the predetermined life of the fund. Most are value add in structure.
The majority of the syndication deals we’re invested in reside in the value-add class. This is where the sponsor acquires an asset (i.e., apartment complex) that needs TLC.
Many times, updates need to be made to both the exterior and interior of the buildings such as:
- upgraded fixtures
- new flooring/carpet
- granite countertops
- stainless steel appliances
- new cabinets
- painting units
- new lighting
- new signage
- update fitness center/pool
- parking lot
- update clubhouse
- new landscaping
These funds are capital gains driven where most of the expected return is earned from the sale of the asset versus the income stream.
It normally takes several months to years to implement the rehab process therefore closed end funds may deliver negative returns in the initial years. It’s critical to perform your own due diligence on the sponsor’s track record as these funds are contingent on the execution of an underlying business plan.
Open-end Real Estate Funds
An open-end fund structure, unlike a closed end fund, has no termination date. Because of this, they mainly a employ a “buy-fix-hold” strategy as most of the expected return is derived from the property’s income stream.
The main advantage of this fund structure has to do with “flexibility“. Sponsors can focus on long-term capital appreciation for their investors and aren’t forced to liquidate assets.
But the need to produce strong, recurring cash flow may potentially reduce the aggregate income stream, resulting in a lower total return versus a closed end fund.
Something else to consider is that open end funds typically have a lower risk profile since immediate cash flow is part of the acquisition criteria.
Final Thoughts On How To Invest In Real Estate
You now know at least 10 different ways you can invest in real estate. You can choose to invest actively where you may have to get your hands dirty and deal with tenants. Or you can be like me and go the passive route.
Either way, if you’re looking for alternative ways to generate income for retirement then real estate may be the right choice for you.
The best way to decide which one will work best is by doing research on each type before making any decisions.
I have had about 10% of my portfolio in REIT Index funds for the last 10 year and have been very disappointed. They spin off a lot of taxable income (so they really should be in tax deferred accounts) and their return has been much worse than standard stock index funds. Certainly not the great returns that people talk about in real estate recently.
What confuses me though, is why do these different ways of investing in real estate converge in terms of their performance? I view many of the 10 ways listed above to be along a continuum of active/passive management from buying your own property to a REIT/syndicate.
Has anyone else been disappointed in REITs and wondered the same?
Jeff Anzalone says
When I invested heavily in Vanguard index funds in the past, I thought that if I got into a Vanguard REIT, that meant I was a real estate investor.
Wrong – O!
After beginning down the syndication path, it’s nice to have those taxes deferred while enjoying the quarterly distributions. I have yet to pay taxes after 7 years of investing as I continue to invest each year using new depreciation to offset passive income.
This has been a very interesting read and touched on many parts of the different real estate options that can be used to bolster your net worth.
My hubby and I were inspired to buy individual rental houses about 20 years ago and although we’re now down to three properties (having liquidated some over time), they have been very good income producing properties and appreciated tremendously in the south Florida market which enabled us to become multi-millionaires. Although we were very conscientious about diversification, like another person commented , including REITs in our portfolio, these never made a very positive impact in our overall NW. Although we were never aware of the real estate syndication options, that sounds like something worth exploring. Thanks for the insight.
ESI and Jeff,
can you please list your syndicators/GPs you have a good experience with?
Jeff Anzalone says
These are available for our Passive Investors Circle members (accredited investors only). https://www.debtfreedr.com/passive-investors-circle/
I get a lot of requests to do this but haven’t done so yet on the site. That’s because there’s a whole lot of context/caveats even with what I consider to be the “best” syndicators (and this can even vary deal to deal). Plus my opinions may change over time and I can’t always go back and update every post where I may have mentioned someone. Plus, I’m still a newbie at this and would like to see several deals go full cycle before I make any recommendations.
Maybe someday I’ll do this on ESI Money, but not in the near future.
I do share my thoughts in the MMM forums because there’s more of a conversation back and forth there (the very nature of forums) and there are much more experienced syndication investors as well. Members post deals as well as syndicators and there’s always a great discussion on the pros and cons of each. If you’re looking to get heavily into syndication investing, the $300 (when on sale) annual price of the forums is money well spent IMO.
We live in a duplex and rent out the other unit. It’s a great way to lower your housing expenses. We also have a rental condo. Unfortunately, that one didn’t gain much value over the last 10 years. At least, it’s bringing in passive income. I’ll sell when our tenant moves out.
We also have REIT and invested with crowdfunding. Fortunately, crowdfunding has been good for me so far.
My son is going to college next year. We’re also contemplating buying a duplex and letting him Airbnb the other side. Once he moves out, he can Airbnb both sides. The MOST important part of this is getting him exposed to real estate before he becomes an orthodontist.
Tom Murin says
I had a 2 family house for 10 years. It turned out to be a fantastic investment and kept my overall housing expenses quite low. It didn’t require much extra work since I was living there to provide “on-site” management. I held onto the place for a year after we moved, but it was much harder to manage remotely from 30 miles away. Part of the issue was that I rented to college students who didn’t even know how to use a plunger to clear a simple clog in the toilet!
Have rising interest rates impacted your view or underwriting criteria on RE investments?
I still see RE syndicates underwriting acquisition and exit cap rates ~5%. I struggle with these assumptions when there is no premium to the risk free rate. Any commentary on how you consider this would be helpful.