#80: 16 Different Ways to Invest in Real Estate

Foreign. Welcome to the Passive Income MD Podcast, where we talk about creating your ideal life through multiple streams of income. I'm your host, Peter Kim. If you enjoy hearing about this stuff, make sure to hit subscribe so I can bring it to you every week. Now, let's get on with the show. Hey, everyone. Hope you're having a great week. This week's episode is gonna go by pretty quickly. It's one of those episodes where I just spit out a list of different ways to invest in real estate. Now, if you're in a position, you're in a car where you don't have an opportunity to take some notes, that's okay. This episode will be here for you when you wanna go back to it. But I also have a post on the blog that is pretty similar to what I'm gonna be talking about today. That post is called 16 different ways to Invest in Real Estate. We might have a bit more than 16 when we talk about this today, but. But I'm gonna go over some pros and cons of investing in real estate and different ways to do so. Now, you probably heard that advice before, hey, invest in real estate. Whether you're looking at my blog or the Facebook group or you've heard from other people and there's some definite benefits to investing in real estate, and it's good for you to understand those. But if you're just starting out for some people, they have no idea where to get started or how to get started. I remember I felt like that when I first started investing in real estate. I'm like, how do I. What's the best way to jump in? The way I feel about it is it's kind of like if I decide, hey, I want to. I want to be in medicine, I want a career in medicine. That alone is not enough to tell you, you know, exactly what you're going to be doing. It's a kind of general direction to head in. But you have to understand, you have to figure out, oh, you know, do I want to be a doctor? Do I want to be a nurse? Do I want to be another, you know, field? Do I want to specialize in? What do I want to specialize in? There's so many different ways. And the investing real estate is very, very similar to that. There is a huge umbrella ways to get involved, whether it's actual buildings on the financing side. And we're gonna be talking all about those things today. I'm gonna be talking about some of the pros and cons, and maybe it'll get your head spinning, or at least the gears in your mind thinking about, hey, maybe this is. This sounds good for me and I'll look into it a little bit more. So let's go ahead and get started. Now, this first section, I'm gonna be talking about having some sort of direct ownership of a property. Now this might be you as a single investor, this might be with you as a partner, or honestly, this is you investing as part of a group, like a syndication. And we've talked a lot about that, right? But either way, you own a piece, if not the whole thing of these type of properties and deal with the benefits, the pros and cons of investing in these type of things. So let's just go over this list. Now, the first way is to invest in single family homes. Now this might be the easiest way for you to actually understand investing in real estate. You know, many of you have probably bought your own homes, but when you do it as a rental property, you own a single family home or a single condo, and you rent it out to a tenant. Now the plus is that this is pretty simple to at least conceptualize on paper. You have a property, you rent it out to a tenant. And if it's like a single family residence or single family home, people tend to take care of that property better. Usually there's families in there. The, the minus and the con to it is that if it's vacant and you have one unit, you have no income coming in for that month. And so that can be a problem for a lot of people who depend on that steady cash flow. Now if you own a duplex, triplex or quad, two, three or four units, that's simply more units under one roof. But again, the process is pretty simple. Buying tenants and collect rents. Now, the pluses to having more than one unit, it's that you tend to have better cash flow. I mean, if one unit goes vacant, then at least a steady cash flow, you can still have the others bringing in rent. And that's nice because then you never have a period where you're, you know, you don't have any income coming in. Now, it can be a little bit tougher to self manage or at least manage overall, because you have to deal with more tenants. That means more situations, more issues, sometimes more turnover. And so that's what you have to deal with. Now if you go bigger than four units, anything five or more, that's usually called an apartment, right? Or a multifamily property or building. The reason I split that up is that lenders and banks treat these buildings that have five or more units differently. The type of loan that you get is very, very different from what's called a residential loan for four units or below. This loan is considered a commercial loan, totally with a different set of landing standards, lending standards, qualifications, rates and terms. You know, when you invest in a syndication, and a lot of the syndications that you might have seen, where people pool their funds and they invest in other people's deals, usually these operators or sponsors who are putting together these deals, a lot of times the ones you might be approached with or the ones you might see have to do with apartment buildings and multifamily properties. What happens in that type of situation is yes, you also own the property, but someone else runs it and you get a portion of the profits. Now what's nice about investing in apartment buildings, whether you own it or invest in a syndication, there's something called economies of scale where even though you have more units, you can still have single management, a single property manager that takes care of more units. You might still have one roof, but it might be a bigger roof, but again, you just have to deal with one roof for many, many units. When these type of properties, the value of the property is also based on income. Not like an emotional type thing like buying your home, but it's actually based on the actual income that it produces. And then there's. That means that there's an opportunity to take that property and dramatically increase the value of the property with good management. And that's by increasing income and decreasing expenses. The minus of this is that it's a little bit more management intensive. There's more people in there, there's more tenants and units to deal with, more turnover. And so it does make sense to hire a professional in this type of case. Another way to get involved is in retail. Now what is that? These are these strip malls that you see on every these corners. Maybe it's like also what's called a triple net lease, where it's a situation where you own the land in a building and a property in a business like CVS or Walgreens or Dollar General or these kind of things might operate and pay you rent for being able to use that space. You know, the pluses of this are that, you know, these are longer term leases, typically often at least minimum three years. And if it's something called triple net lease, where they are honestly paying all of the taxes, the insurance, they're also paying, you know, taking care of all the maintenance, this kind of thing, some of these leases are like 20 to 25 years. So it's very, very steady type income. The downside to this is that it's not always easy to swap tenants. It may not be like people looking at apartment buildings. Sometimes when a corner or a staple or one of the main tenants leaves, it's not easy easy just to get a new tenant in there. So these things can remain vacant for a while, especially if it's not in a great area and it's not in the area of growth. Now there's something called mixed use spaces and that's probably just what you think it is. It's just a combination of residential, might be retail. We'll talk about some like office space and industrial. The good thing about mixed use, and these are really popular these days, is that there's different types of income, different types of tenants, very varied type of leases. And so it can provide some steady income over time. The downside is that you have to understand all these different niches to be successful. Now I just mentioned industrial properties. What is that? It's typically warehouses and you know, it's all the rage right now, especially with Amazon, all these fulfillment centers. Businesses need to have warehouses that they store and ship out of it. And this demand for this is not going anywhere anytime soon. The good thing for these are that you're not dealing with like tenants and tenant issues, meaning like you know, people and that sort of thing. You're dealing with businesses and it's known to be a very, very steady type performing niche with very little day to day management on your part. You just have to make sure that the building is working well, the facilities and the basic electrical and things like that are working well. But usually the, the tenants are managing, the businesses are managing the day to day. Now the downside is that usually there's a single tenant. So if there's a point where they decide not to rent, it may take some time to find another tenant down the line. Another thing I just mentioned before was office space. That's obviously in today's time things have changed quite a bit. Where we always said, hey, businesses always need a place to have their staff. And this sort of thing with everything happening with remote offices have taken a little bit of a hit. But it's also maybe an opportunity for some people who know how to kind of marry the whole in office out of office, know how to actually target the right companies and businesses that might still need in house people to run their businesses. Again. The nice thing about these type of investments, you know, it's that they're typically longer type of leases and the type of tenants that you're dealing with are usually more professional and they're usually paying and that sort of thing. Next we're going to talk about self storage. You might have heard about this, but it's simply where people just take their stuff. They don't have enough room in their houses and so they go and they stuff it in these garage type looking things. These are called self storage facilities. They popped up all over the place. People just have too much stuff and they don't know where to put it. It doesn't belong in their house or they don't want it in their house. So they actually just rent these big again bays and garage doors and they just stuff their stuff in there. And many people don't even use it or look at it again. But these things have popped up all over the place because people need a place to store their stuff. And so these have been very, very popular, you know, that I've seen over the last five or six years. I think that it's known to be a little bit more resistant to recession. I mean people want to keep their stuff, they'll pay to keep their stuff stored when it comes down to it. Right? Just like you want to pay to have a roof over your head. And so you don't also have to deal with a lot of the typical landlord tenant type issues, loud neighbors, overflowing toilets, these kind of things. Now it is very reliant on management, who knows how to fill these units, is good at marketing and hopefully it's in a good location. It's all about customer service when it comes to these self storage facilities. So it's important to partner with good people who know how to do this well. Okay, what number are we at right now? I think we're somewhere around nine or ten. And I'm just gonna keep on rolling. Next is we'll talk about mobile home parks. You've heard about this. It's a popular investment because they technically tend to do well in times of economic stress. And if you're one that believes we're in a position where there might be a correction anytime soon. Some people are going to mobile home parks because they think that this whole affordable housing is going to be an issue. And it's always been an issue for people when the economy does well. And when it doesn't do well, people need to live somewhere. So what happens is that when you own a mobile home park, whether it's you or you're investing with a group that that owns it. You, you own the land. And the mobile homes sit on these land, you know, on this land, and they pay rent to have their homes housed there. Now I've seen people invest in these, usually in the form of funds where you'll invest with a large operator who knows how to operate and run and manage these things. So they'll own many of these, you know, and pool capital and provide returns. You know, the good thing about these type of investments, from what I've heard, again, there's little tenant turnover and they're known to do well even in times of economic kind of downturn. Now if you're trying to do this on your own and have your own mobile home park, I heard getting a loan for these type of investments can be quite difficult, can be a little bit capital intensive as well, which is why I think people prefer to invest in these type of investments as part of a fund. Next is just owning land, raw land, right? I mean there's an area of land where you're like, hey, that area could be developed. Somebody wants to develop it someday. Maybe you want to, maybe you think somebody else will and you willing to take a gamble on it and, and buy that property where you. Sorry. Buy that land where you think it's in the path of progress. You know what you can do, you can do a lot of things with land. You can improve it, you know, you can build on it, you can divide it up, you can entitle it. But there are different ways to make money with land. The good thing is that you have no real tenants to deal with. But the downside is that they say that land eats three meals a day, meaning that you will be paying for that land. You'll be paying like if you bought it with a loan, you're going to be paying for that loan, but it's not creating any sort of income for you. I know some people put a billboard sometimes up on it, but that land is not doing anything while it's sitting there. It's not producing income for you. But I know that there are some people who are very speculative and are good speculative investors and they figured out ways to take land, create more value from it, or they know it will be more valuable in the future. They park their money there and are able to sell it down the line just to a future buyer investor. And the last way to kind of invest through some sort of direct ownership of owning some sort of property or land is through short term rentals. Now these are all the rage especially it seems like in the Physician world because there are ways to really benefit tax wise from these short term rentals. But what it is basically it's just Airbnb or VRBO or vrbo, whatever you wanna call it. It's where you have a property or a room or whatever it is and you rent it out for short term rentals. Like basically owning, you know, basically like hospitality business where you own a, you know, you're renting out a hotel room. Now the plus of this, and the nice thing about this is that they're typically, you know, if you've ever tried to rent one out on your own, you know that it costs more to rent things out for a short period of time, just like a hotel room. So if you own one of these properties in a very, very popular area, vacation spot, the amount of income that you can produce on a monthly basis can far exceed renting it out to a steady tenant for on a yearly basis or a monthly basis. The problem is they are a little bit more management intensive. So management costs tend to be a lot higher. Now if you find for a single family home or a small apartment building, you might find that management costs 8 to 10% of kind of gross rents. However, with these short term rentals they can jump from anywhere from 18 to 25%. However, the cash flow that you get from it can support that management and net of it. I know that a lot of people who are doing this well are getting really, really significant amount of cash flow and income from these short term rentals. There are also some really great tax benefits that you can take advantage of as a high income professional. That's outside the scope of this talk. But just so you know, there are ways to offset some of your W2 income with some of the losses, at least paper losses on these short term rentals. Okay, Some other ways to invest in real estate now we're going to get outside of direct ownership. The other way is through things called REITs, real estate investment trusts. Now they can either be what's called public REITs or they can be private REITs. Now public REITs are basically very, very, I'd say it's similar to having a mutual fund for stocks. Right? When you invest in a reit, you invest in a company basically like a stock, you own stock of a company that invests in real estate. They manage these properties, they create profits, they give out dividends to investors. And of course the stock price of it, if it's doing quite well, can go up over time as well. This can allow you to invest in really High end real estate, these large commercial properties with professional management. However, if you're looking for diversification or true diversification from the stock market, they find that public REITs tend to correlate a lot more with the overall stock market than, let's say, some of these other types of real estate investments. And so it might not provide the diversification that you're actually looking for. The nice thing about it, again, is that it's sold on the stock market. So you can go to your brokerage, buy a reit, sell it, you know, with another click of a button. Now, there are things called private REITs, just so you know, these are ones that are not publicly traded, basically the same. It can be the same type of concept where you can buy and sell. However, you have to go to private REITs to be able to invest in them as well. Now, they might have some higher returns because they're private and they're not quite as regulated as public REITs. However, you might not be able to get in and out of them quite as quickly. The other thing is that they're typically reserved for what's called accredited investors, meaning that you have to have either a certain income to qualify on a yearly basis, or you got to have a certain level of net worth. However, if you're looking to get into some of these private REITs, some of these crowdfunding companies allow for anyone to invest in these things even without being credited investors, and the options are there for you. So let's talk about some other creative ways to invest in real estate. Another way is through something called tax liens. Now, we all have to pay taxes as a homeowner because if you don't, the government can place what's called a lien, L, I E N on the property, which is a legal claim for the taxes owed on the property. So if those taxes go unpaid, then whoever owns the lien at the end of the day can essentially take ownership of the property. These tax liens, just so you know, they often get auctioned off because the government doesn't want to own these and savvy investors, they're able to take ownership of these liens, then it's possible to actually ultimately acquire the property, right, at a tremendous discount. The potential for huge gains is there if they know how to navigate this world well. However, the due diligence on these, it takes a good amount of knowledge and experience. So you don't see a lot of beginner investors doing this on their own either. They invest with someone more knowledgeable. Sometimes they invest In a fund that takes care of some of these. But it's not something for, for someone who doesn't know how to do the proper due diligence on these. Another type of investing, real estate, is by investing in notes. N O T E S It's like being the bank and having the borrower pay you monthly interest and principal. You know, I was surprised when I found out about home loans that they're not always with the banks, but sometimes they're owned in the form of private notes. There's a humongous market out there for this and there are people who specialize in buying what's called non performing notes, meaning that the borrower is late on payments. Now the owner of the note, just like if it's like you're the bank, you could be willing to sell that note to somebody else who's willing to pick that up. They want to own that mortgage and this might give the opportunity for that buyer to get the person to start paying again, right? Or they can actually close and foreclose on the property and take it over. There's a lot of flexibilities with these notes because you might just own a note that provides constant income. Or again, there's an opportunity for a note that might not be doing that well, somebody's not paying on it and that sort of thing, to figure out ways to get that note working again or honestly buy that property at a discount. Now the nice thing about owning a note, especially if it's paying you, it's that it can be an easy check every month. Just like the bank, you just get interest and principal every single month. Now, just so you know, this type of investment can get quite complicated if you don't know how to deal with these notes, and especially ones where if you buy a note and that, you know, they stop paying on it. You've got to know what to do next and how to deal with either foreclosure or, or being able to sell off those notes on a different type market. I believe personally that dealing with these notes, it's not something that's easy for someone to do on their own. But if you invest in some sort of note fund, that's probably for most of us listening to this, it's a lot more passive. And it helps to know that if something goes wrong or there's some issues with it, someone else can help you through that problem or issue. Now the next type of investing is something called hard money lending. You might have heard of this before. It's actually pretty similar to A note where you act as the bank or a lender and then a borrower will borrow money from you and pay you back a certain amount of interest every month. The difference here, why they call it hard money lending has to do with the term of the loan and then the interest rate. They tend to be for shorter terms, somewhere between 6 and 18 months, not these longer 7, 15, 30 year type loans. These are for shorter periods for specific causes. Right. And it's at significantly higher interest rates. Often you'll find them anywhere from 8 to 15%. Now you might be thinking who is borrowing money at 8 to 15%? Now a good deal of the time it's the fix and flippers. They can't get conventional lending, but they need short term cash to buy, turn the property around, renovate it and then turn it around for sale. Now this is a type of category. This fits in the category of debt investing, right? Debt det. Now this falls in the category of debt investing where you own the debt on a property. You'll see a lot of these on these real estate crowdfunding sites. You'll see them on other platforms where you have an opportunity to act as the bank, lend money out and make money on the interest. Now the good thing about this is that the you're usually getting paid on a very steady type return. You know exactly what the interest rate is and you know how you're getting paid. Sometimes there are points that are added to give you additional fees and you get paid on that as well. Sometimes there are fees for extensions and so you can get paid on that. The downside is that you might have to deal with foreclosures or deal with this situation. If somebody actually stops paying you, you have to deal with that. So again, the question is whether you want to do this type of investing on your own or do you want to invest with somebody else who is maybe has a fund and is dealing with all these things and investing your money and then paying you back a return. And the last way to invest in real estate that I want to talk about is simply the fix and flip. And the reason I want to end with this is that everybody has seen this on TV before. You watch hgtv, you've seen it where people buy homes and they will fix it up, they'll renovate it and they sell it for a nice profit. And I know they make it look really easy. It can be a lucrative business. However, just realize it's not as easy as they make it out to be. Your part, you know, you're Kind of at the mercury of where the market is at the time and understanding how to do all the renovation in a timely way. Just so you know, you're probably taking on loan like we talked about loans, like we talked about this hard money loan. So you're on the clock and it is, I would say, a full time job for someone. Now, if you're a high income professional, there are probably better ways to make money, probably doing your day job. But for some people it can be fun, it can be a fun project to fix up a place and make money at the same time. However, the downside, again, it's not as easy as HGTV ends up, you know, making it seem like. And there are a lot of people who got stuck with these fix and flips when they bought a property, expected to renovate it and sell it for a gain. However, the market took a shift and they weren't able to do so and they lost a good amount of money. So I think that fix and flips, it is basically like having another day job. And personally for me, it's not something I'm interested in, but maybe you are. So hopefully from hearing about all these different ways, and I'm sure there are even more, investing in real estate is not just about like buying a home and renting out. It's way more varied and diverse than that. I mean, this whole industry, there are so many ways to get in. Now, part of the decision you have to make, obviously it starts with understanding your goals, understanding some of the benefits that you're looking for and some of the downsides to try to mitigate that risk. It's trying to figure out how active do you want to be, how passive do you want to be, what are some of these niches that really interest you and that you think you could really dive in and understand how to do these things? Well, a bunch of these things also have different profiles for what type of cash flow they bring in, what their risk profiles are. Now, personally, I've tried to invest in as many of these niches as possible only because I like learning about a lot of different ways. I've had direct ownership where I own properties myself. I even tell people recently I just bought my first short term rental. I invest a significant amount in syndications and funds, both debt and equity, where you actually own part of the building or you invest in the debt and actually are kind of like the bank. So I invest in all these type of ways. What I'm trying to do is build a whole portfolio of different ways to invest in real estate to ultimately produce cash flow from me, which is like again, it helps me replace my income and allows me to totally have freedom to over what I want to do with my time and who I want to spend it with. So again, personally, I don't know anybody who invests in all of these ways. Hopefully you heard a couple of these things. Maybe it sounded interesting enough to you to kind of pursue them further, but either way, the goal is to figure out what works for you to help you personally get closer to your goals, and I hope one of these can help you. All right, have a great week everyone. Let's talk again soon. Enjoy the show. 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