How to start investing in private real estate deals
The investment process can be intimidating. There is a lot to learn and there are so many options – even narrowing down to just a few investments can be difficult.
However, if you've been reading this blog for a long time, you know that property investment (in my opinion) is the quickest way to build passive income streams and ultimately gain financial freedom.
Where do you start Well, this article gives you a good idea of how to get your first real estate contract. Let's jump right in.
The first step with any new company is to learn about as much process as possible. While learning is great over time, the better you are ahead of time the better.
First of all, it is important to determine your investment style. Some people prefer a more active approach, while others prefer their real estate investments to be as passive as possible.
I will explain the investment strategy “active versus passive” in more detail. In summary, it can be said that real estate investments largely fit into this spectrum:
Adapted from the FYFA course – White Coat Investor
On the left side you have active investments. The main lesson from this category is that you are the landlord and the investments are more practical. In general, the more work you do monthly, weekly, or even daily, the more active the investment.
At the other end of the spectrum are funds and REITs that offer a much more passive approach.
This training is not about choosing exactly which investment option is suitable for you (that will come later), but simply determining how active your investments should be. Do you prefer the liquidity of more active investments? Or do you agree to tie up some funds in the long term for a more passive approach?
It's really up to you and your personal goals.
As you may have guessed, we will focus more on the passive side of the spectrum as we continue our discussion. However, most of the steps listed apply to almost every real estate business.
Once you have determined which end of the continuum you feel most comfortable with (and which one suits your goals), you can narrow down which investment options are best for you.
Limit your investment options
As you may have noticed, there are several ways to generate residual income from property investments. In a way, this is a continuation of the step "educate yourself", but with more specific goals. Here are some ways you can invest, as well as some things to consider when looking at them.
In short, syndication occurs when multiple investors contribute to a large pool of capital that is then used to invest in a single property opportunity. This strategy enables any investor to make a deal that would otherwise have been unaffordable.
Typically, these syndications are formed by a "syndicator" for the purchase of a particular property. This is great for the investor as you know exactly what you are getting into before you invest.
Real estate funds
Funds work a little differently, of course. Real estate funds usually don't focus on specific properties. Rather, the capital is pooled and then used to either buy multiple properties for later sale (equity funds) or to lend money for short-term returns, such as fix-and-flippers (debt securities).
There are actually many types of funds that fit many different goals. While they are a great way to invest in real estate, performing your due diligence is critical to your success (more on that later). You can find more information in this article.
Real Estate Investment Trusts (REITs) are companies that own or operate real estate investments. As an investor, you do not invest in the property as an owner, but are essentially a shareholder in the company. These shares are usually traded on the public stock exchange and are therefore easy to buy and sell.
However, as an investor, you tend not to take advantage of all the major tax benefits of a property investment because you are not considered to be the owner of property, and ultimately your upside potential is also limited.
There is also much debate about whether it actually offers real diversification, as values tend to correlate much more closely with the stock market than other passive real estate options such as syndications and funds. In this post I will focus more on the latter.
Crowdfunding is a good place to start in real estate investments. As with syndication, you can contribute to a larger pool of capital that is then used to buy one or more properties. After the investment, sit back and wait for the dividend checks to arrive every month.
However, what makes crowdfunding great for beginners is that investments are made through an online platform that makes it very easy to find deals. You don't have to contribute much either – I started crowdfunding at just $ 5,000. And although due diligence is still important, most platforms take on the guesswork.
Indeed, performing your due diligence is important no matter which option you choose. We'll talk more about that in a moment, but it's worth repeating. Researching a good deal is a long way, and to get it going again you can find those deals much more effectively if you take the time to educate yourself.
And although it's not particularly exciting, take the time to learn the numbers before making decisions. At the very least, you should understand what numbers are related to the business and how this affects your goals. You don't have to be a number guru or anything, but a basic understanding will go a long way.
Now that you've understood the categories and general investment options (and hopefully decided on a method that fits your goals), it's time to find some actual offers to invest in.
But where do you find them?
In the past, your only option was to be well connected. You basically had to know the right people who knew the right people.
But with the JOBS law, many deals were legally published online so that everyone could see them. These deals became the crowdfunding platforms I mentioned earlier. This is also a great way to get started, and I've even put together a list of the sites I recommend.
However, many people say that the best opportunities are still the ones you will never see publicly advertised.
To find such offers, it is helpful to hold real estate conferences on a regular basis and to network with experienced syndicators in the room. Conferences like this often take place locally or even nationally. This is a fantastic place to learn, meet people, and even find opportunities. You can read about our conference last year here.
In addition to such conferences, it also helps to network with other experienced investors. You can find like-minded investors simply by asking. You will be surprised how many of your employees invest – or at least are interested in discussing their own goals.
Finally, join an investor club. There are many, many options for this, each taking into account different criteria for joining and goals. If you are interested in this idea, we would be happy if you join ours! We often offer opportunities that you won't find easily elsewhere. Find out more here. Note: You must be an accredited investor to become a member.
Perform due diligence
I've already mentioned this briefly, but it's such a crucial step that I think he deserves a section of his own.
Once you've narrowed down the types of deals that work for you and actually found one, it's time to take advantage of this training. The next step is to review the business and make sure it is an investment that you want to make.
The most important parts of the due diligence can be divided into three categories: who conducts the business, the property itself and the market on which the property is located.
Who makes the deal
The group, often referred to as a sponsor, syndicator (in the event of syndication), operator or manager, can make or cancel the investment.
Before making an investment, it is important to review the track record. How successful have you been in the past? How long have you been doing this? How does the group deal with risks?
A large part of the selection of a sponsor is based solely on trust. Make sure that they present information clearly and are fully transparent about their previous business relationships.
For more information on checking the sponsor, see this case study.
In the case of syndications and crowdfunding, where you know which property will be involved in the business, you should carefully consider the history of the property and plans for the future.
Make sure you understand the condition of the property. It probably won't be in terrible shape, but will it need a new roof? Will the floor need to be replaced soon? Find out about upcoming costs related to maintenance.
You also want to examine closely how the property behaves now and how it behaves in the past. You can also look at other properties in the area to get an even better idea. You also want to keep an eye out for expected renovations or conversions that could improve operations.
Finally, you want to take a look at the market where the investments are made. Important questions are: Is the environment emerging? Are companies opening up in the region or are people moving away? What is the general purpose of the environment, i.e. housing, industry, etc., and is this likely to change soon?
Ultimately, you want to get a full feel for as much of the investment as possible – not just the investment conditions.
Finally the time has come. You narrowed down a type of investment, selected a deal, and performed your due diligence. It's time to make your investment.
Although you probably found this in the research phase, it is important to make sure that you are qualified for the business you have chosen. Being qualified usually means being an accredited investor.
While accreditation is not required for many businesses, many do. Such deals typically have minimum investment thresholds of $ 25,000 – some even $ 250,000.
Whether or not you are an accredited investor shouldn't stop you from investing, but it could shut you out of certain trades. Find out more about what it means to be accredited here.
Okay, with the last hurdle out of the way, there's only one question left. How do you actually make the investment?
Well, usually you have to transfer the funds, just like with any real estate transaction. The operator or platform that hosts the store has an account and you must transfer the money to that account.
The key here is to make sure that this is done safely and in the safest way. After all, it is likely that you are dealing with a lot of money. It is vital that it arrives at the right place and is protected on the way.
The last step is sometimes the most difficult. Up to this point, everything was up to you – from training to research to investment. Now all you have to do is sit back and wait and trust the sponsors to carry out their business plan. This can be the hard part.
The large part, however, is simply waiting for the distributions. At some point they will return capital and one day the building will likely be sold. After all the first work, all you have to do is make sure that these checks go to your bank account.
At this point, I hope that you can use this information and narrow down a procedure that is suitable for you. Education is the key, and although it is best to be as well prepared as possible beforehand, there are always some lessons to be learned in this way. The key is to get started.
If you want each of these steps to be broken down in detail and have a resource that will help you safely invest in passive real estate deals, I would definitely recommend you take our Passive Real Estate course Academy.
Not only will you learn thoroughly, it's also a great opportunity to meet like-minded people along the way. The registration opens. If you're interested, you can re-join the waiting list next month for exclusive discounts! >>Join the waiting list here. <<