Interested In Real Estate Investments? Consider This Advice, First
Many blogs, white papers, and even radio commercials, discuss the wonderful benefits of dealing with real estate. To read these articles, or listen to these exciting announcers, you might come away with the idea that all you need to do to make a killing in real estate is to put your money into an asset, and come away with thousands upon thousands of dollars.
While real estate can be a very good investment, we’ve mentioned in previous blogs that there is no such thing as risk-free investments. No matter what the internet or radio suggests, conducting research and self-analysis is essential, whether you are considering an active or passive real estate investment.
Active Investment Considerations
With an active real estate investment -- sometimes called a “direct” investment -- you will be hands-on throughout the entire process of buying, owning, maintaining, and selling that duplex, office building, or small warehouse. The main advantage of a direct real estate investment is control. You decide when to buy, how to finance, how long to own, and when to sell.
If you are considering investing directly in real estate, consider the following.
Know yourself. While “direct control” might sound great in theory, it also means you have responsibility for everything connected with the real estate ownership, including the main three Ts -- trash, tenants, and toilets. Before making that investment, take an honest assessment as to whether you are landlord material.
Understand additional costs. If you believe your only real estate cost involves the acquisition, think again. Real estate ownership is costly. Property maintenance requires cash. Vacant space can add to your costs, if you can’t find a tenant. Every state, municipality, and county charges taxes, which takes a bite out of your bank account. Then there are emergency costs, such as if the roof blows off or the bottom floor floods. The buying price is just the beginning.
Be familiar with the legalities. State, county, and municipal laws govern your property and ownership. These laws can include tenant rights, property changes, zoning, adverse possession, and property rights, to name a few. While you don’t need to become a lawyer yourself, working with a real estate attorney is highly suggested.
Passive Investment Points
As a passive real estate investor, you outsource the selection, acquisition, management, and disposition of investment properties. You do this either by buying shares of publicly traded or privately held Real Estate Investment Trusts (REITs) or through the acquisition of partnership units in a Delaware Statutory Trust (DST). The main benefit of passive investment is that you don’t need to worry about landlord responsibilities. You also won’t have any control over the acquisition, maintenance, or sale of properties. However, you do need to consider the following as a passive investor.
Know your investment entity. You must research your DST sponsor or REIT prospectus before investing. Examine track records, market/asset knowledge, potential rates of return, and strategies. Public REITs offer this information up-front; you’ll have to ask for it from private REITs or DST sponsors.
Consider diversification1. Because the minimum amount required for passive investment is far less than for active investments, it’s possible to spread your risk across several vehicles by investing in different REITs and DSTs. The key here is to find financial vehicles that make sense for your portfolio.
Understand additional costs. While “additional costs” from a passive real estate investment differ from those involved with direct ownership, they exist, and can include upfront and ongoing fees, as well as anything you might have to pay to exit an investment vehicle.
Advice, for Both Active and Passive Investments
Whether you are an active or passive real estate investor, that investment will be illiquid. In other words, you won’t be able to immediately sell for cash, if you need it. Publicly-traded REITs are the exception to this, as they are traded on the open market.
Other issues to consider with any real estate investment include the following.
Geography. Not all real estate will provide the same potential rates of return. One reason is location. A Class A multifamily property in Lubbock, Texas will have different market dynamics, demand, and supply than the same Class A multifamily property in Dallas, Houston, or Austin.
Asset types. “Real estate” is a broad asset category. It can encompass everything from the summer home you want to own and rent out, to the portfolio of medical office buildings in which your DST is investing, to the institutional-quality lifestyle centers your REIT owns and operates. Each of these asset types has a different life cycle, as well. Understanding where your real estate is in the life cycle can help you understand -- and manage -- investment risks.
Exchange requirements. If you are planning to defer payment of capital gains taxes through a 1031 exchange into real estate, you need to know the requirements. There are different ways to structure exchanges, depending on whether you want to move capital gains from the sale of a physical property into a DST (or vice versa). It’s also possible to exchange into a REIT, though doing so requires different steps.
Research, research, research
The article authors and radio announcers touting real estate aren’t wrong -- such investments can provide steady cash flow and decent investment returns. However, what they don’t tell you is that investing without due diligence is a sure path to failure. Whether you decide to put your money directly into a strip shopping center, or opt for a REIT or DST investment, the best advice is: Research.
Investigate and examine all facets of your targeted real estate, to ensure you’ll end up with something that offers an acceptable risk-reward ratio.
To learn more about the ins and outs of real estate investments, contacted Realized Holdings for a no- obligation consultation by logging on to realized1031.com or calling 877-797-1031.
1 Diversification does not guarantee a profit or protect against a loss in a declining market. It is a method used to manage investment risk.
This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intending to be used as a primary basis for investment decisions. It should also not be construed as advice, meeting the particular investment needs of any investor.
There is no guarantee that the investment objectives of any particular program will be achieved. The actual amount and timing of distributions paid by programs is not guaranteed and may vary. There is no guarantee that investors will receive distributions or a return of their capital. These programs can give no assurance that they will be able to pay or maintain distributions, or that distributions will increase over time.
Download The Guidebook To IPWM
Learn More About How Investment Property Wealth Management works.