I’m not here to educate you on money. You made it this far by saving and spending less on your own and probably doing better than most of your friends in the financial aspect. Maybe you inherited a lump sum or have a nice chunk in your current 401K. What are your options with investing in real estate? For the sake of this exercise say you have $50,000 in your savings account. You are proud of that and you should be because that’s a great accomplishment. Are you just going to let that $50,000 sit there and collect that 1% or less of interest in that account? Why would you do that when there are other means to make what you worked so hard for WORK FOR YOU. What I plan to achieve in this article is different options for you to invest your capital using real estate. We’ll dive into different avenues that will provide you with the right tools and options to help you invest and seek better returns that what a bank or CD account can provide through real estate.
One option is you can go out and buy an investment property. Find a deferred maintenance (needs rehab) property in or out of state that meets your criteria and purchase with the down payment using your $50K for the down payment of the property and to rehab. Purchasing in a market where you can not only rehab the property but also use a portion for the down payment of the property upon closing. Hire a property management company that watches over the property on your behalf, so you don’t get the phone calls in the middle of the night and you just sit back and get mailbox money if you have tenants. Otherwise, you are paying for the property till a tenant comes back in. Quick note: I’m glossing over the fact that you bought this property correctly where the rents are more than the mortgage and someone else is paying that down adding to your net worth. Months later, you can refinance your $50K back out and now you are receiving an infinite return because you have none of your own money in the investment. Then repeat this process repeatedly adding to your net-worth and collecting mailbox money (difference of the rent after the mortgage & other expenses mailed to you by the property management company). This could take time and if you have it, well worth it.
Another avenue is being the bank. Find some local fix and flippers (people that buy houses that need major repairs and sell them for profit) that you can lend your funds on through a promissory note and loan that $50K for anywhere from 8%-12% pending your market. Fix and flippers are always looking for capital to take on more projects and complete them as fast as possible. Assuming all goes well, when the project is finished you are making anywhere from $2,000-$3,000 per loan you send out on your initial $50k growing it faster than any bank account could. Quick note: Please make sure you know the local fix and flipper. If they have a great track record and feel comfortable with them then make your funds work for you. This helps to build your savings and grow it faster than any bank product can could if you kept it in an account. The income earned on each loan adds to the amount you can lend out to fix and flippers which provides opportunity to negotiate better interest terms to increase returns on future flips.
You can also just invest passively and partner with someone that has experience and they can go do all the work while you provide the capital and sit back and collect mailbox money. Sounds easy and why not? It allows you to focus on your responsibilities that you wouldn’t be able to focus on if you were to go at it alone. There are tons of benefits with taxes and adding to your net worth with this opportunity and different options. You can partner on smaller units and have 50% equity and split everything evenly. Quick note: Again, trust is a factor here and make sure your partner has experience. Going in get an idea when you will see that $50k back if there is a chance for refinancing in the future. You want to get that infinite return. Establish if you are to use a LLC and an operating agreement to determine everyone’s role. If you want to go bigger, 20 units or more, become a limited partner, also known as LP’s, in a syndicated deal with general partners. A syndicated deal is when you buy into the limited partnership of the business. The general partners, also known as GP’s, manage and run the operations of the business for these so you don’t have to worry about anything. This sounds more complicated but it’s easy and the syndicator putting the deal together will walk you through it. Also, the returns are better than the smaller deals. In most cases you can get your initial deposit back within a few years off a refinance and continue to receive the infinite returns at your bought in shares. If the property is refinanced again, you still get your shares for that refinance and same goes for if it was sold by the general partners. Quick note: Trust and due your homework on the GP group. Make sure they are using SEC attorneys and ask questions and even meet with them to see if you are comfortable. Usually, GP’s like to work with only accredited investors (passive investor must have a net worth of at least $1 million, excluding the value of their primary residence, or have income at least $200,000 each year for the last two years. $300,000 if combined income if married). Occasionally they will allow non-accredited investors into the fund. Once you are receiving infinite returns, you are now set up to go invest in other syndicated deals and keep building your passive income returns and net worth.
As you can see you have different ways to invest in real estate as I just listed a few. Not only will you receive tax benefits, you also create long term wealth by adding to your net worth and create passive income. Done enough times, you might have more time to enjoy doing the things you love to do.
Written by John Fortes