Real estate investing is as old as recorded history extends back. Indeed, it used to be said that investing one third in business, one third in property, and one third in cash was the way to stay safe. How to access real estate investments safely is another matter entirely. Not every investment vehicle over the years has been a good one.
The limited liability partnerships in the 1970s that were overleveraged with many collapsing taking almost all investors’ capital with them is a key example of this. The modern real estate investment trust (REIT) that largely replaced partnerships was an answer to these problems and slowly brought investors around to the idea of putting money into different forms of property investing again. Modern partnerships are also excellent when investing in quality real estate assets too.
Protecting Yourself When Investing Directly
When making any direct investments in real estate or businesses, it’s important to understand how to protect yourself. You can buy into property directly in your own name, but you’re putting your financial future at risk when you do. A tenant has an accident on the stairs and you’re possibly going to get sued. It doesn’t matter if the case has any merit – just dealing with the lawyers and reaching a settlement to make the problem go away could bring you down financially.
When investing directly in real estate or business generally, always consult a reliable attorney. They will advise you to own either a limited partnership (LP) or a limited liability company (LLC). This isolates your property or business investments from your personal assets. Anything goes wrong, they should be coming after the company and not you.
How necessary is it? Just consider late actor Burt Reynolds who invested $20 million into a restaurant chain. He did so in his own name and ended up bankrupt as a result. And it can happen to anybody.
Investing in multi-family apartments is one of the better ways to put money into real estate. They’re attractive because in some parts of the U.S., it’s possible to buy an apartment complex in a good neighborhood where each apartment only costs $60,000 a piece when bought in a block. Having many tenants rather than just one with a single-family home, you’re not always worrying if the single tenant will pay the rent that month to cover the mortgage and upkeep costs; you’ve got diversification benefits with many tenants in an apartment complex.
This type of property investment is difficult to invest in even if you have a six or seven-figure net worth because multi-family apartment blocks sell for tens or hundreds of millions. It’s much easier to invest through this company to gain access to high-quality, well managed multi-family assets. You can see exactly what properties they have invested in and where they are, so you know they’re excellent, profitable real assets to own as part of a larger portfolio.
Single Family Real Estate
Another way to go is to buy a single apartment or house. People often end up doing this indirectly because they move out of their home once they’ve bought a new, larger one. Then instead of selling their previous home, they retain it as an investment property.
This is difficult because usually they’re the property manager and deal with all the issues associated with tenants and property management. Successful single-family investing relies heavily on vetting tenants to avoid losing money to non-payment and having costly expenses to go to court to get a non-paying tenant out.
Single-family is often something people invest in through their working lives. They initially plan to live off the property when they retire, but most find as they age that getting on their hands and knees to fix a plumbing issue or taking late-night tenant calls gets to be too much in their 60s and beyond. At this point, they end up selling and struggle to find a new investment with the proceeds of the sale if they’ve only ever invested in single-family residences.
Commercial Real Estate
Commercial real estate is a different animal to residential real estate. With commercial property, it is valued more often based on the net rental yield it generates as an investment and not the land or building value per se.
Investing in commercial real estate whether in offices, warehouses, or mixed-use properties is a costly exercise. It usually requires a seven or eight figure net worth to get started due to the size of each property. It also helps if the investor has previously been a property manager in that type of property and knows the market intimately. Getting into commercial property investing is difficult if that’s not the case because it’s totally different to residential real estate.
Real Estate Investment Trusts (REITs)
The real estate investment trust has modernized since its early beginnings in the turmoil of the 1970s. It’s a tax efficient structure where the REIT can invest in operating properties of any type and pay out the majority of its net income as a cash dividend to investors. This ensures they remain tax efficient and avoid double taxation of the income.
REITs have paid anything from 2% to 12% yearly income over the years. The average has been around 7% but most now pay closer to 3.5%. Investors can buy a low-cost index fund from Vanguard to grab a meaningful slice of many trusts, pick REIT sectors, buying international REITs, or invest in individual REITs directly or through a DRIP scheme. REITs are also useful as a passive investment strategy.
There are many different ways to get into real estate investing. Unless you’re going to devote considerable time into research across broad sectors or real estate types, or even individual companies, then it’s best to buy a well-managed real estate fund or a REIT index fund. Both provide access to high-quality assets that throw off livable income in the form of cash dividends. For retired investors, the income matters far more than when they were working.