From residential rental properties to REITs, find your perfect real estate plan
There’s one surefire way never to make any money in real estate: Not to invest. Yet everyday, people tell me they would love to invest, except [insert excuse here]. And I’ve heard just about every excuse in the book—they don’t have any money, they don’t know what the options are, they are scared of making a mistake, they are not sure it’s the right time, and so on.
Well, as Wayne Gretzky once said, you miss 100% of the shots you don’t take. If you never start investing, you’ll never reap the rewards and escape the rat race. So allow me to quickly address the most common excuses named above:
Money: You have the money. You simply choose to spend it on other things. Instead, you should look at your budget and reallocate the amount you feel comfortable spending on investments each month. Sure, you might have to cut back in other areas for a bit, but isn’t that going to help you reach your long-term goal?
Knowledge: Before you dive in, start off by doing research—I suggest starting with a free workshop to educate yourself. Or tap into a trusted resource who has found success in real estate and ask them to be your mentor.
Confidence: You’ll want to find the right first property to begin, and this takes patience and number crunching. Pick an area where vacancy rates are low and choose a property that offers the amenities people are looking for.
Timing: If you’re investing for cash flow (not for flipping), the market direction really doesn’t matter as much. You aren’t hoping to earn a quick profit by selling before your mortgage paperwork is even dry. This is a long game, not easily affected by the ups and downs of the market.
So, now that I’ve debunked all those lame excuses, what’s next? You just have to start. Taking the first step is often the hardest on any new path. So here are a three ways you can get started—pick the one that resonates with you and begin!
Residential Rental Property. Once you own a property, you become the landlord of your future tenants and are responsible for paying the mortgage, taxes and maintenance costs (and possibly a property manager, if you don’t want calls about broken appliances at midnight). Ideally, you’ll want to be able to charge more than your monthly costs, so that you earn a profit. This is your cash flow—your paycheck for filling the property with a quality tenant. For instance, I now own thousands of apartment units across multiple states—but I didn’t start there. I started with one single-family house. And I’d recommend the same for you.
Real Estate Investment Trust. A real estate investment trust (REIT) is created when a corporation (or trust) uses investors’ money to purchase and operate income properties (residential and commercial). REITs are bought and sold on the major exchanges, just like any other stock. According to Investopedia, a corporation must pay out 90% of its taxable profits in the form of dividends to keep its status as an REIT. By doing this, REITs avoid paying corporate income tax, whereas a regular company would be taxed its profits and then have to decide whether or not to distribute its after-tax profits as dividends. Since the 1960s, REITs have been a popular choice for income investors due to their reliable payouts and massive capital appreciation potential.
Real Estate Investment Groups. If you want to own a rental property, but don’t want the effort associated with being a landlord, this option may be the right solution for you. Akin to small mutual funds for rental properties, a company will buy or build a set of apartment blocks or condos and then allow investors to buy them through the company, thus joining the group. The company operating the investment group manages all the units, handles maintenance, advertising vacancies and interviews possible tenants in exchange for a percentage of the monthly rent.