REASONS FOR PASSIVE REAL ESTATE INVESTING
Everyone has different reasons for investing passively in an investment of real estate. Lets first talk a little about the differences between active and passive investing.
ACTIVE INVESTING VS. PASSIVE INVESTING
There are many ways to invest in real estate and they generally can be divided into two categories: active or passive.
An example of active investing is the buying of real estate properties, fixing them up and selling them, or acquiring apartment buildings and managing the tenants. While this strategy can be lucrative, it can also be time and labor intensive. Many potential investors are ill-equipped, or simply do not want to take on these burdens. This is where passive real estate investing comes in.
With passive investing, rather than purchasing a property that needs intensive day to day attention, you provide funding to real estate investment company toward the purchase of larger commercial properties that they oversee for you.. Your 401k and self directed IRA allows various ways for you to invest in real estate on such a passive basis, most people aren’t’ aware of this. You can contribute to the down payment on a loan to purchase a specific property , which entitles you to a fixed, regular interest payment, a portion of the equity upon the sale and also some of the tax benefits of owning a piece of real estate.
TYPES OF PASSIVE INVESTMENT.
Debt vs. Equity Investing
Similar to being comfortable with the time horizon for an investment, you need to understand and be comfortable with the risks of the investment. There are two main types of passive real estate investing: debt and equity.
Debt: When investing in real estate debt, the investor is in the position of a lender to the deal sponsor. Investors receive a fixed rate of return that is determined by the interest rate on the loan, which is secured by the property itself. Debt investments place the investor at the bottom of the capital stack giving the investor priority when claiming a payout from the property.
Equity: In terms of equity investments, returns are realized in the form of a share of the rental income the property generates, less any service fees paid to the investor. Investors may also be paid out a share of any appreciation value if the property is sold.
Inflation and Appreciation
Everybody hears about inflation….Inflation is one big reason to invesest passivly in real estate. How is money lost through inflation? By not having your money invested in hard assets. Cash is considered by many to be the safest asset. You generally won’t lose your principal if your cash is in the safety deposit box at your local bank, or hidden under your mattress. However, if you don’t invest your capital, your cash actually does lose money each year. It’s the result of this nagging issue called inflation. This is cause by our government printing extra dollars into the money supply. There are basically taking money from us when they do this. Average annualized inflation for 2016 was 1.3%. If you sat on cash that whole time your purchasing power would be diminished by that amount each year. And inflation is expected to rise down the road. This is one reason why people invest in the first place. When we invest in paper assets, you are not really in a better place though…Tangible assets like real estate is a great hedge against inflation..When inflation goes up…the price of your real estate investment go up right along with it…Protecting you from the destructive power of inflation
PROFESSIONALLY MANAGED AND OVERSIGHT
Another great reason to invest passively in apartments is the ability to have your investments professionally managed. By having your investment with a company who oversee your investment, you get multiple layers of management to keep an eye on this. Most apartment syndications will use a large professional management company to run the day to day operations with the investment company keeping tabs on them. We call this managing the manager. Daily, weekly and monthly reports are sent to the investment company to see how operations re going with the investment. There are also scheduled and unscheduled site visits that occur to keep the property management company on their toes. Having these multiple layers of oversight helps the passive investor sleep at night by knowing there many professionals overseeing their investment.
HIGHER THAN NORMAL RETURNS
Most investment of the type we are talking about here generate higher potential returns that what are normally seem in the stock market or returns you are getting on your CD’s at the bank. When a company invests in apartment buildings using investor capital. The projects are underwritten with a game plan to generate specific returns that meet the investor’s needs. In this plan is also a way to “force” appreciation in the property also increasing potential returns on the sale of the asset.
These are just a few reason (there are even more!) to invest your money in some type of passive investment….
Give us a call at 510-863-1447 if you have more questions about apartment investing.