In 2012, a group of seven of my friends decided to purchase a rental home together. We found a nice undervalued property, fixed it up using our own labor, and rented it to one of our friends’ parents for a fair market rate. After a few years, we were able to pay off the house and we now operate it debt free. We have great tenants that always pay on time and take care of the house like it’s their own. This project has gone as well as we could have expected, and I love the idea of investing in real estate. Yet, I have since decided that I won’t invest in any real-estate projects that I have to manage personally in the future, simply because of the ongoing work involved.
Owning and operating real-estate is a business, not a passive investment.
I recently read Crushing It in Apartments and Commercial Real Estate by Brian Murray. The book highlights opportunities for real-estate entrepreneurs to purchase troubled properties at cheap valuations and turn them around by weeding out bad tenants and affordable property-improvement opportunities. In the book, Murray recounted how he turned around a property called the Solar Building in Watertown, NY. He made a compelling argument about real-estate as a business opportunity, but it is much more of a business opportunity than it is a passive investment.
If you are going to purchase single family homes, an apartment building or a commercial office building, you must do much more than write a check and work out financing with a bank. If you decide that you want to manage the property yourself, you need to locate and screen tenants, collect rent checks, tackle maintenance items, monitor the property to make sure your tenants behaving themselves, complete property improvement projects overtime, operate a P&L for your real-estate business and be on call to deal with emergency issues. Some of these tasks would be alleviated if you hired a property manager, but you would still need to hire the property manager, regularly monitor their work and handle complaints whenever they miss the mark.
While some real estate investors may not mind rolling up their sleeves and taking a very active role in managing their properties as business owners, I couldn’t realistically do this even if I wanted to. MarketBeat is now a mid-seven-figure financial publishing business and the highest and best use of my work time is operating MarketBeat and continuing to grow it. If I’m showing properties, dealing with maintenance issues or spending any significant amount of time managing my real estate investments, I am spending less time operating and growing the business that values my time at more than $1,000 per hour. This is scenario is likely true for many successful business professionals that would have capital to invest in real-estate. It will never financial make sense for you to do home repair projects on a rental house if you’re an attorney that gets paid $200.00 an hour to do legal work.
Don’t get me wrong. I love real estate.
There’s a lot to love about real-estate investing. First and foremost, you own something real. You own a physical building that provides a valuable service to a renter. You also own the ground the building sits on. No matter what happens to the U.S. economy, you’ll still own that building and the land that it sits on. You get many great tax benefits, such as depreciation. You receive a steady stream of payments from your tenants in the form of rent checks, which is great for anyone that is looking for a source of retirement income. Finally, you can use a commercial mortgage to create leverage, which can magnify your return on investment if done properly.
Last year, I invested in a real-estate syndication that purchased five hotels called Bird Dog Hospitality Partners. This is a standard 8%-preferred return deal, where individual investors (like me) receive the first 8% return the investment generates each year and any return after that is split with firm that setup the deal (Bird Dog Equity Partners). Bird Dog is now even launching its own hotel brand, Everspring Inn and has setup hotels in Bismark, ND and Oskaloosa, IA. I couldn’t be happier with the management of this deal and look forward to participating in the next fund.
I freely admit that I am not capturing the full value of the return generating by owning and operating these hotels, but I’m not doing any of the work either. As a capital partner, I’m receiving a great rate of return on my initial investment. As the operating partner, Bird Dog is receiving a fair share for their work in setting up the fund, finding undervalued hotels to purchase and managing the hotel properties after purchase. My work involved in this deal is limited to writing a check, signing some initial paperwork and reading year-end financial statements. I get almost all the benefits of investing in real-estate (steady income, good returns, tax benefits), without doing any of the work myself. While I can’t prove it, I really do believe my time is more profitably spent by running MarketBeat and investing in real-estate passively rather than trying to directly invest in real estate and losing focus on MarketBeat.
How Busy People Can Invest in Real-Estate
There are many ways that individual investors can invest in real-estate without directly buying properties or becoming a land lord:
- Publicly-Traded REITs – You can purchase many real-estate investment trusts (REITs) through a standard brokerage account. REITs often own commercial property such as malls, hotels, senior care facilities and commercial properties. I recommend investors stick to property REITs and avoid REITs that only hold mortgages, which are much more volatile and sensitive to interest-rate risks. You can learn more about investing in REITs in my income investing book, Automatic Income.
- RealtyShares and Fundrise – These two companies are part of a growing trend of crowd-funding real-estate platforms. They allow accredited investors to purchase equity as limited partners in real-estate projects or loan money to other real-estate investors that want to purchase and improve properties. Investors typically must invest a minimum of $25,000 and target and internal rate of return (IRR) of 12-15%. I have not personally invested in either of these, because I really believe you need to have a good understanding of who your operating partners are in a real-estate investing. I am not sure you can get that through these platforms.
- Real-Estate Syndications – Private equity firms and real-estate developers often work with individual accredited investors to fund part of the purchase or development of real-estate projects, with the remaining funds coming from a commercial loan. Individual investors are limited partners in such deals and receive a preferred return (often 8%) and split the remaining profit with the property developer. The hotel fund I invested is a great example of a real-estate syndication. In Sioux Falls, Lloyd Companies, Bender Commercial Real Estate and Ernst Capital Group are examples of firms that do real-estate syndications.
Real-estate can be a fantastic investment, but you need to invest in real-estate in a way that makes sense given your other economic opportunities. If you want to make real-estate investing your primary business, it may make sense to get your hands dirty and manage properties directly. Given the opportunities I have with MarketBeat, I’ll likely remain a passive real-estate investor for the foreseeable future.