We have all heard some type of quote about the success of real estate investing.
John Stuart Mill, a British political economist from the 1800s states “Landlords grow rich in their sleep without working, risking or economizing.”
Andrew Carnegie, the great American industrialist billionaire states “Ninety percent of all millionaires become so through owning real estate.”
And, to quote Louis Glickman, an American real estate investor, “The best investment on Earth is earth.”
We are told from a young age that investing in real estate, or at least buying a home, is a great idea. But, how do we do it? What are the different types of real estate investments, and how do they work? Can anybody invest? Do you have to start with millions of dollars, or is there a way to do it sooner? This six part series will outline the different types of investment and how to implement them.
Before we can talk about the different types of real estate, we must define what investing is. Webster defines “invest” as:
“To expend money with the expectation of achieving a profit or material result by putting it into financial schemes, shares, or property.”
With that definition, it is clear that an investment is the vehicle in which one spends money to achieve a profit. For our purposes, that vehicle is real estate, with profit being the anticipated result.
Real estate investing produces many different types of profit. That could look like a lump sum from the sale of real estate, tax write offs and deductions, tax credits, appreciation, monthly cash flow to name a few. The question you have to ask yourself is, “what type of profit you are looking for?” Is that monthly cash flow, lump sums or appreciation?
Real estate is also a great investment because of how much money you can leverage. If you were to buy gold, silver, stocks, bonds, bitcoin, or anything else, you would only be able to buy the commodity for what it is worth at that time. For example, if gold is worth $1300 per ounce, then you would need $1300 to buy that ounce of gold. With commercial real estate you can typically buy four times more than your dollar amount, and almost twenty times in residential depending on what loan type you qualify for. For example, in order to purchase a four million dollar apartment complex you would only need to put down one million dollars. That is to say, your dollar goes further if invested correctly in real estate.
The five main types of real estate investing include:
Flipping / Wholesaling - This type of real estate investing involves buying a home below market value, often in disarray, then updating and fixing the home to sell for a profit. You would then take that profit, put it into the next project and continue rolling funds to leverage more flips. Wholesaling is where you act as a middleman. You would locate a home to purchase, make updates, then find a buyer who is willing to pay more than your purchase price and sell it to them for a profit.
Real Estate Investment Trusts (REIT) - This is more like a stock and treated like a mutual fund. This is because you are buying a share of a corporation that owns real estate assets. It was created by Congress in the 1960s to allow the everyday person some of the benefits of real estate investing.
Small Multi-Family Deals (1-4 Units) - This can be a great starting point for the beginning real estate investor. Most of the residential loans you can qualify for a single-family home, will also allow you to purchase up to a four units if you owner occupy. The ideal scene here is that you live in one unit for free, while having three other units are paying your mortgage and expenses, but that isn't always the case. (see "The Four-Plex Myth")
Large Multi-Family Deals (5+ Units) - This is where real estate investing really begins to show its benefits. Commercial real estate begins with five plus units. In future articles we will explain how to analyze deals, asses cash flow and when to buy and when to walk on these deals. Large multi-family deals is where the true cash flow happens.
Syndication - Syndication is where multiple people get together and invest in a large deal. This is a way to pool money with several investors, managed by a trusted person or entity. The manager takes care of the asset, and the investors are paid certain agreed upon dividends based on their initial investment.
In our next articles, we will go in depth on each of the investment types. If you have any questions about real estate investing, or just getting started, reach out to us at firstname.lastname@example.org. Whether it is a multi-family investment in Anchorage, Alaska or elsewhere we can connect you with both great information and highly educated professionals.