Is Real Estate Investing for You?

Real Estate is a much-misunderstood asset class. It’s where just as many fortunes are made as are lost.

If you’re like most folks, you have dreamed of making a killing in real estate, especially given the popularity of all the flipping shows on TV.

According to Bankrate magazine, in 2015, Americans’ top investment vehicle was real estate (27%), followed by cash (23%) and then stocks (17%).

Individual preference and personality traits played a heavy role in who favored real estate investments. If you’re highly risk-averse then you will have to think long and hard about real estate as an investment.  

The preference for real estate investments varies by geography and demographics. For example, investors in western states tended to lean more heavily (35%) on real estate investments than those in other states. Middle-aged folks (age group 30 – 49) also more heavily favored that asset as an investment.

As you’d also expect, income was also a factor in who prefers real estate versus other investments. Whether you’re a “rehabber” – (buys, repairs and sells properties) or a buy-and-hold investor, the article suggests that a part of the decision to invest in real estate tends to be based on one’s net worth.

For high-net worth individuals (defined as those with a minimum of $1M in investible assets, excluding any equity in one’s primary residence) the article recommends having between 5% and 15% of assets in real estate investments. $150K is a nice chunk of change to invest in real estate.

What about folks with less money? Although there’s no recommended amount, if you’re in the “regular-folks” bracket, then you’ve got to look at lower barriers to entry.

Two of the more popular indirect approaches are Real Estate Investment Trusts (REITS) or pooling resources.

REITS are similar in concept to stocks, in that shares of these funds are typically traded on a public exchange. That these funds are regulated, offers some modicum of protection against unscrupulous principals. Of course, regulation does not mitigate investment or market risk. The principal benefits of this approach are:

  1. Minimum investment amounts usually are much smaller than those required to buy property directly.
  2. Being a strictly hands-off investment, there’s no real need to understand all the intricacies of real estate.
  3. It eliminates day-to-day hassles of direct real estate investing.

Partnerships or so-called “private lending” or “hard money” loans are other ways to participate in the real estate market. Unlike REITs, such investments are placed either directly with a rehabber or with a partnership. These are individually-negotiated arrangements between the real estate principal (usually flipper) and you, the lender.

Although these arrangements are sometimes backed by legal documents such as promissory notes and deeds-of-trust, they are not regulated. The onus is on each participant to ensure that their respective interests are protected to an extent to which they are comfortable.

A quick online search returned numerous lenders that pool resources from smaller investors and promise returns from 7% to 12%.

With rehabbers, the minimum investment typically is around $50K whereas, for partnership pools, investments can be as low as a few thousand dollars.

So, if you’ve got the stomach for it, there are many ways to play in the real estate market.

Real Estate Investing

Pros:

  • Appreciation
  • Favorable tax treatments,
  • Cash flow
  • Tangible asset – possibly convertible to personal use.
  • Could be done on a part-time basis.

Cons:

  • Maintenance costs
  • For buy-and-hold investors (Tenant-related issues)
  • For “flippers” – project management costs and other issues.
  • Risk of market decline
  • Illiquidity

In future articles, we’ll look at some of the issues involved as a direct investor versus other approaches.

As always, we welcome your thoughts on the article or anything else that’s on your mind.