The sooner you begin looking for opportunities in real estate, the more options you will have to grow your portfolio and build your wealth over the course of your life. Many individuals wait to become investors because they do not believe they have the resources to get started immediately. However, thanks to several different avenues through which you can get started in becoming an investor, there is less of a reason to wait. Here are some ways you can start buying real estate today:
Invest on Your Own
If you have the capital available, then you can buy a property on your own. The first step in figuring out which property you can buy is to determine your buying power – this means speaking with a bank or a mortgage broker to understand what you qualify for. Keep in mind also that many times, lenders lend based on the economics of the deal as much as your own.
In this initial phase, you will also want to identify what property type you want to invest in (single or multi- tenant retail, multi-family, office, industrial, residential, mixed-use, storage, etc.); to learn more, you can contact local real estate agents and schedule meetings with them or read up on the benefits/disadvantages to each asset class. Both can offer insights on market trends, discuss your goals with you, and help you determine which asset type will best help you achieve those goals.
Once you have your product type identified and you understand your buying power, you can start looking a potential investments. The simplest way to identify what is on the market is to utilize the online sites that agents use to market their properties – this includes CREXI, Loopnet, MLS, etc. However, at this point, you may want to seek out opportunities from agents in the area – Contact those that appear to have experience in the market you are focused on. Remember to discuss with them what off-market opportunities they may be able to direct you toward as well.
The Friends and Family Route – Establish an Investment Business with Co-Investors
If you do not have the capital to acquire a property on your own, then consider partnering with friends and family to buy a property together. The best way to approach this scenario is to set up an LLC, or a Limited Liability Company. An LLC allows multiple investors to come together and purchase real estate while simultaneously protecting each investor’s personal assets.
If you are going to take this approach, you will again need to assess the purchasing power that the members of the LLC feel comfortable with; then, you will need to identify the goals of the investment. Remember, many times lenders lend based on the economics of the deal. Ask each member what type of property they want to invest in, find out what is their expected financial objectives. It is extremely important to have open communication with partners and understand the wants of each individual investor; a bad partnership (or more commonly – different philosophies in investing) can have a negative impact on the financial position of a property. However, by understanding each member’s position and creating a strategy that helps meet the goals of every member, allows better long term investment relationship blossom.
Raise Capital
Similar to that of working with co-investors, this scenario will also require that you set up an LLC or other legal entity. However, in this situation, you will be the decision maker and provide the additional investors shares or interest in the company. What does this mean?
Identify a strategy for investing and then develop a business plan. You will need to identify the product type and the amount of capital that you will need, outline the financial level of operation of the property you are seeking, and outline the opportunities in your identified markets. Once you have this developed, you can reach out to other individuals to raise capital. You can consider high-net-worth people in your community, institutions, as well as friends and family members – There is no limit on this; you are seeking individuals or institutions who would be interested in investing in your business plan.
To work with the investors who are interested in proceeding, you will need to have an investor agreement drawn up; this should be completed and checked by your lawyer as goes for the entity you will set up for investment purposes. This agreement will include your proposed plan of action and the timeline by which you expect to pay back the investors. Once you have enough capital to fulfill your purchase price, execute your business plan.
Invest in Passive Deals
Lastly, you can invest in other people’s deals. This can be done via syndications, REIT’s and funds. This option allows you to invest your capital into different real estate deals without the responsibility of management, allowing you to collect passive income. Let’s review the difference between the three.
Syndication
A syndication is when multiple investors invest together usually into a single real estate opportunity; most of the time you raise money AFTER to find a deal. Syndications are generally structured as LLCs, or Limited Partnerships; the sponsor, or the investor who is putting the deal together, will be assigned the role of General Partner or Manager, and all additional investors will be limited partners or passive members. Once the real estate is purchased, you will receive your return according to the deal’s structure.
REIT – Real Estate Investment Trust
A REIT is a company that owns, operates, or finances income-producing real estate; investors can invest in these portfolios via an exchange traded fund (ETF), a REIT mutual fund, or through the purchase of the company stock, which will be listed on major stock exchanges. They provide an investor the chance to receive competitive total returns and dividend income. In addition, they provide liquidity to an investment, meaning the investor can sell their equity when they like. The disadvantage to that is that you will pay a “liquidity premium” or a higher price for that liquidity.
Real Estate Funds
Real estate funds are like mutual funds that focus mainly on invest in real estate; they can include individual properties, a collection of properties, real estate investment trusts, or debt. To gain a better understanding of real estate funds and to determine if this is the right option for you, it is best to review and understand how mutual funds work. Funds often are blind pools of investors meaning the properties come AFTER the investment has been committed to.
Each of these opportunities provide an investor with an approachable access point they need to start investing towards building their wealth. Each option includes its own unique set of costs, risks, responsibilities, and benefits, and each one requires a slightly different amount of capital. Armed with this knowledge, readers can choose the entry point that is most well-suited to their individual financial position and personal goals.
