When most people hear “real estate investing”, their mind goes to a landlord with a property rented out to tenants. Some picture a person sitting back in their chair counting money while others imagine someone trying to unclog a toilet at 2:00 am while water continues to fill the bathroom. From my experience, it’s usually somewhere in the middle. What if you don’t have the desire or time to be a landlord? Are there ways to invest and take advantage of all the benefits of real estate? Below are a few ideas to help you get started.
Private Mortgages (Target Annual Returns 6% – 16%)
The last number of years banks have become a lot more strict with who they lend to. This has created an opportunity in the private space for investors to become lenders and take advantage of the security real estate offers. Self-employed individuals, people that need to consolidate debt, those that want to renovate, etc. can all make great borrowers. If the borrower misses a payment, there is recourse available to get your capital back because you’ll be registered on title of the property. While you hope it never comes to that, it’s reassuring to know you have options if necessary.
Mortgage Funds (Target Annual Returns 8%-12%)
Where a private mortgage is investing in one property, a mortgage fund allows you to invest in a pool of private mortgages. This enables you to diversify your holdings and spread risk out. As with any investment, there are certain funds that are better than others and offer different advantages. Because you usually aren’t on title like you are in an individual private mortgage, the most important element in a mortgage fund is the team running it. Their ability to underwrite high quality loans and balance that with incoming capital is crucial to the success of the fund.
Private Equity Partnerships (Target Annual Returns 20%+)
The two above examples are investments into the debt component of real estate. Because debts are registered on title, it can make them very secure. If the thought of making returns around 12% doesn’t excite you, equity investments may be for you. Essentially, you are becoming a partner in a development project. Your capital may go towards land acquisition, soft marketing costs, working capital, etc. As a partner, you usually get paid out at the completion of the development in one lump sum as opposed to the monthly payments private mortgages pay. Private equity investments carry more risk than a mortgage therefore offer greater returns. Each investment is only as good as the developer and project so make sure to choose carefully.
Joint Venture Partnerships (Target Annual Returns 10% – 20%+)
Joint Ventures are ideal for someone that has capital and the ability to qualify for a mortgage but doesn’t want to be hands-on in an investment. They become the money partner while the other group is responsible for finding the opportunity and managing it from start to finish. Most Joint Ventures that I have put together are split 50/50 but there’s no established rule about it. You can do it whatever way you see being fair. For example, I breakdown the ownership into 35% for the down payment, 15% for holding the mortgage, 15% for finding the investment opportunity, and 35% for managing it. You’re forming a legally binding partnership with this person / group so make sure it’s someone you share similar vision and ethics with. It’s really easy to get caught up in the excitement of the deal and put this aside but I almost guarantee it will become an issue later on if something unexpected happens.
While I was only able to briefly touch on each topic here, I hope you’re able to see that there are some great products out there which allow you take advantage of the benefits of real estate without giving you a second job or taking up your valuable weekends. If you have any questions or have a topic you would like me to write about, send an email to [email protected].
**Disclaimer – this article is designed to make you aware of different investment options out there. Everyone’s financial situation is different and investments should be tailored accordingly. Speak to a trusted professional and remember there’s no substitute for your own due diligence.