Many new real estate investors understand the difference between “buy-and-hold” and “fix-and-flip.” These are both real estate investment strategies, but they don’t comprehensively describe the different options available to you as an investor looking to put money in the real estate business. In fact, the menu of options can quickly become intimidating.
Let’s boil it down to the four major types of real estate investments, as well as some important subtypes …
1. Buy Property Outright
We all get this one. A person, family, partnership, or small company buys a house, a piece of land, a commercial building. The investment is not known to be liquid — but all asset-management decisions are in your hands as the property owner.
A wealthy family might employ a private company called a “Family Office” to manage its real estate transactions. Pioneered by the Rockefeller dynasty, family offices may buy properties outright, but they also may direct family funds to invest in other real estate investment types.
2. Invest in a Fund / REIT / Syndication
A real estate “fund” pools money from multiple investors to buy real estate, the way mutual funds pool investors’ money to buy stocks or bonds. A fund usually raises money to buy larger quantities or higher-cost properties. An average investor can become invested in a large apartment complex, skyscraper, commercial investment, or multi-property portfolio by investing in a fund.
There are two major types of funds to be aware of:
REIT stands for “real estate investment trust.” REITs register with the Securities Exchange Commission, which comes with heavy fees and legal oversight, so REITs tend to offer lower risk but smaller returns. You can buy and sell shares of a REIT on the open market, just like stocks or bonds, but you have little say in how the underlying assets get managed. REIT’s often have to abide by a very strict legal protocols including distribution of most of their income to their shareholders limiting their flexibility. REIT’s are one of the most liquid real estate investments because they are shares that often can be readily sold on the open market. They are known to have a liquidity premium, meaning there is as increase in their price because they are more easily sellable in the form of individual stocks.
Private Syndication / Funds
Syndications are like REITs in that they are pools of funds. A private syndication avoids SEC registration through exemptions that limit who the fund manager can solicit to. More so than REITs, these may offer greater potential returns due to more flexibility in their regulatory restrictions. This also indicates their losses can be greater as well.
Shares of a syndications are not as liquid as REITs. Having a fund manager that has the same strategies as you is key because that will dictate how funds transfer back to the investor, as well as how the asset is managed.
3. Become a Private Lender
If an investor needs to close quickly and intends to do a fast flip, (s)he may prefer to borrow at a higher interest rate from other investors, rather than slug it out with a bank. You could loan your money out at hard money rates (10%+) interest with a lien on the house as security. Be careful to loan much less than the actual value of the property; a conservative LTV (Loan to Value). Also get an attorney for this because you will need a lot of documents and recourse should the borrower fail to maintain their end of the deal.
4. Buy a Mortgage Note
Banks and private lenders sometimes sell non-performing mortgage notes to private investors to liquidate bad investments, sometimes for pennies on the dollar. Here, you buy the right to collect the mortgage payments or foreclose the property. Foreclosures can be very expensive so a heavy discount on a note is wise.