You’ve heard about it, read about it, and seen it. It’s no mystery that real estate is a hot investment right now; as both a part of a well diversified portfolio and as an investment on its own. If purchased correctly, an investment property has the ability to provide long-term cashflow from the rent paid as well as a profit (capital gain) when its value increases because of renovation or market appreciation.
Remember, your investment personality should drive the strategy you deploy.
If you have the capital set aside and available to deploy, it can make sense to purchase an investment property and rent it out yourself. The good news is, we’re in an environment right now where you can find lending products specifically designed for the purpose of buying rental property. These loan programs are generally popular when property values increase at a steady pace and it can be proven that the cashflow from monthly rent could be used to meet monthly expenses. But let’s not forget during the crash, that many real estate investors, who purchased incorrectly, found an oversupply of properties and falling values left them underwater; and with a property that could not be rented or sold for their purchase price!
Your investment personality
Buying a property yourself can require a high level of investment and as a result, make it more difficult to have access to capital if you suddenly find yourself in a tight spot financially. Remember, your investment personality should drive the strategy you deploy. Generally, the time horizon for investing in rental properties is long, between 5-7 years. And a timeframe for a good flip strategy will range between 3 months to 8 months.
Both types of strategies will require different types of costs, but ensure you have a solid team so you can leverage your time. For example, costs for rentals will include marketing the property for rent and maintaining the property. This can be a tremendous amount of work for one person, especially if you eventually scale and have a portfolio of 10-20 rentals. Finding the right property management is crucial here.
Similarly, having the right project manager and/or general contractor on-board for flips is important. Hitting specific timelines, working with the county for permit approvals, and meeting with inspectors can quickly become a full-time job for one person. Just remember the goal here – to create a real estate business, not a job for yourself.
If you feel all of this can become overwhelming, don’t fret! There are alternatives that can allow you to invest in property in other ways.
One solution is to buy shares in a public listed fund, like a REIT, or exchange traded fund (ETF) that owns and leases property. These types of funds will normally be larger commercial properties such as office, retail complexes, and industrial units. It is worth considering that other factors than the property market could affect these share prices such as the management of the individual company. The shares can be bought and sold through the stock exchange which is useful for investors who prefer to have quicker access to their funds.
Another alternative is to use a collective investment strategy where your money is pooled with capital from other investors. Different structures have different legal filings and reporting requirements with the Securities and Exchange Commission (SEC). Make sure to follow all of these guidelines if you are looking to raise capital for your projects. Alternatively, if you’re investing with a fund, request the necessary due diligence documents outlining the opportunity and the risks involved.
Whether you decide to operate your own projects, buy into a REIT or ETF, or invest in a fund with other investors, make sure you have a solid understanding of the market, the deal, and most importantly, your investment personality. Without this, other operators and investors will tell you what to invest in and create your strategy Don’t let this happen! If you spend the time to get educated, ask questions, and stay in the conversation, you’ll be just fine.
Until next time, happy investing!