One reason many potential investors shy away from investing in real estate is the myth that they will have to deal with “tenants and toilets” if they invest. While that may be the case, I want to highlight that there are many different ways to invest in real estate that allow you to be as hands off or as hands on as you want! Before we dive in, please note that this post is for information purposes only and should not constitute tax or investment advice, always consult your CPAs and tax and financial advisors for more information.
Active Investing
Even within the realm of “active investing” there is a spectrum of what “active” truly means.
On the “most active” side of the spectrum we have investors who are actively managing their own rental properties. They are involved in all of the day to day activities from screening tenants, creating leases, fixing maintenance issues, collecting rent, etc. Depending on how many rental units you have, this work can amount to a full time job or more. When we moved to Cleveland we were self-managing 9 units by ourselves while we each held full time W2 jobs. We got burned out very quickly and realized that we were spending too much time in the weeds and not enough time building our business; finding new properties, making new connections and doing the things we needed to scale our business. We wanted to be active investors, but we knew that property management was not a good use of our time or skills.
Enter the property manager! If you want to be an active investor and effectively scale your business, a property manager is critical. The property manager takes on all of the day to day management of the property and allows you to focus on finding the next deal. Having a property manager doesn’t mean you should be completely hands off however; we believe it is important to manage your property manager if you want to effectively execute your business plan. Hiring a great property manager is essential, so do your due diligence to make sure you hire the right one! Managing the property manager and other maintenance and construction staff is referred to as Asset Management. If you’re looking to make property improvements, renovate and turn units quickly and effectively, you want to be a diligent and detailed asset manager and partner with the right property manager to make it all happen.
Another way to be an active investor is to be part of a General Partnerships (GP) or a Joint Ventures (JV). In these partnership structures you are working with a team of investors to take down deals and execute the business plan. Each member of the team should have a specific role. For example one team member may focus on asset management, another on due diligence and another on acquisition and broker relationships. In these partnership arrangements everyone gets to utilize their strongest skill sets for maximum benefit. Multi-family real estate investing is a team sport, and these partnerships allow you to maximize the efficiency and effectiveness of being an active investor.
Passive Investing
If you read all of the above and thought “I really want to invest in real estate but I don’t have time for any of that.” Don’t worry! Passive investing might be just the ticket for you!
There are a few different ways to be a passive investor. The goal of passive investing is to truly be hands off. You invest in a great deal with an experienced team who can deliver results and you reap the returns! Here are a few ways you can be a truly hands off, passive investor:
Invest as a Limited Partner in a Syndication: A real estate syndication is where many investors pool their resources to purchase a larger asset than they would be able to afford on their own. In a syndication, the general partners are responsible for all of the hands-on aspects of purchasing the property, managing it and executing the business plan. The limited partners invest capital and collect monthly or quarterly distributions (aka mailbox money). In addition to truly passive cash flow, this type of investment also provides LP investors with all of the tax benefits of real estate as well such as interest and depreciation expense write off! Investing as an LP is also a great way to get into real estate and learn about the process. If you aspire to be an active investor and GP in future deals, I would recommend starting as an LP in someone else’s deal and get paid to learn.
REIT: A Real Estate Investment Trust, known as a REIT, is a real estate investment company that owns and operates income-producing real estate. Investing in a REIT is similar to investing in stock. You own a share of that company, but not the actual assets themselves. While investing in a REIT may provide you with dividend income, you don’t get any of the tax benefits of investing in real estate because you don’t actually own the real assets.
Crowdfunding Real Estate Platforms: This is another way that investors can pool together their capital to purchase real commercial assets. This may be an appealing investment option for investors who don’t know a credible real estate syndicator or who have a small amount of capital to invest. Each platform is different so it’s very important to do your research and understand what you are investing in. Many platforms charge high fees and are only available to accredited investors. Understand the tax implications of the deal you are interested in as every deal is different and the tax implications can be different for accredited vs non accredited investors. These platforms are relatively easy to get started with but in my opinion the fees they charge and the lack of flow through tax benefits means this is more like investing in a stock than truly getting all of the advantages of real estate. As always, consult with your CPA or tax advisor before getting into any deal.
So what’s right for you? Begin with the end in mind. What is your ultimate goal with real estate investing? Do you want to quit your W2 job and live off of the cash flow of your real estate empire? Do you love your W2 job and just want to create a nice stream of extra income every month? Everyone’s goal is different, but I believe in the power of real estate investing to create real wealth and I hope this article gives you some inspiration to get started.