"I've got it. I understand the wealth-building principles of investing in real estate.
I understand the WHY… now I need to know the WHAT… then I can determine the HOW!
I am ready to get started"
If you find yourself thinking this - I invite you to continue reading, this article is for you.
Overall, real estate investing (REI) is one of the simplest and easiest forms of investment to conceptually understand. It doesn't come without it's growing pains, though. Understanding the nuances of underwriting, contracting, negotiating, residential or commercial lending, asset protection, estimating renovations, property management, managing renovations, etc. is difficult without prior experience, and seemingly worthless unless you intend on investing a SIGNIFICANT amount of time learning this trade. Even at its highest levels, where REI is extremely sophisticated, it still is not rocket science.
But it sure feels like that when starting….
However, there are two ways of real estate investing that are ideal for investors that are building education and experience. Both of these investment strategies mitigate the competitive advantage that comes from having high levels of education and experience that comes with years of performing.
After all, according to Benjamin Franklin, there are only two guarantees in life-- and being a successful real estate investor is not one of them. To better your chances out of the gate, follow some of the advice below.
House-Hack- Catchy-term, age-old wisdom. House-hacking is the purchasing of a primary residence (1-4 units) and implementing an investment strategy that makes you money either:
a) while you live there (rental)
b) when you sell the house (live-in flip)
c) a combination of the two
d) indefinitely (long-term, buy and hold)
There are several different ways to house-hack, which range from buying a duplex and living in one unit, to renting out private rooms on platforms like Airbnb or VRBO, to buying a (livable) "fixer-upper" and renovating, or the easiest and most common form of moving from a primary residence and maintaining that house as a rental after moving as opposed to selling.
House-hacking has a competitive edge over other strategies for several reasons:
Fundamentally Sound, Simple Business Plan
The gap between best-in-class operators of the house-hack and amateurs is considerably smaller than you will find in other asset types. The simplicity and soundness of the business plan makes for an easy method for anyone to adopt.
The inefficiency of the market
In 2012, Warren Buffet wanted to purchase a "couple hundred thousand" single-family homes (SFH) but did not have the method to do so. Real estate has always been challenging for hedge funds or Wall Street to buy efficiently. This inefficiency of the market provides an opportunity for investors of all sizes, including beginners.
Incredible, long-term, fixed-rate financing options
No other investment can you borrow up to 100% of the cost of the investment with such long-term, fixed-rate debt. At the time of this writing, mortgage rates are near 2.5%, which is an all-time low.
Low cost of entry
Don’t have a lot of capital to invest? This is a perfect investment strategy for you. With different financing options, you can purchase a home for 20%, 10%, 5%, 3.5%, or even 0% down.
House-hacking is scalable. As long as you are willing to move once every year or two and live in a property that makes you money (good investment properties are typically not the standard retail home), this strategy is one several investors have used several times over.
Excellent Resources to Learn More
Syndication is the most powerful strategy in real estate for many reasons. For the context of this article, it’s most important to understand that syndication allows qualified individuals--regardless of their experience level--to partner with professionals and invest in asset classes that traditionally are not available (to get a clearer picture of what syndication is, check out this article). This includes, but is not limited to commercial multifamily, self-storage, office buildings, retail, warehouses, light or heavy industrial, hotels, developments, etc. Syndication is the method that allows virtually everyone to purchase a piece of larger and more profitable asset.
There are several phenomenal reasons why investing in a syndication is a great strategy - enough to write a book on (maybe that’s a precursor of more to come…). For now, we’ll focus on what I believe to be the 5 most important reasons why syndication is IDEAL for beginning investors.
Access to Bigger (and Better) Deals
Syndication provides opportunities to participate in deals that are simply not available through any other means. This provides access to a wider pool of opportunities and provides deeper connections within specific asset classes. When an owner or broker is contemplating selling, they scrutinize buyers heavily, so time is not wasted on someone who cannot close. Often, these listings are distributed to only a few select buyers via “pocket listings.” These pocket listings are typically much stronger fundamentally than other deals found through other sources, such as official listings.
“Leverage” is used in real estate investing most often to describe the use of debt (mortgage) to purchase a property. While that still holds in syndications, it also applies in at least two other ways that benefit investors tremendously.
1. Leverage other people's money (OPM). Even with a 70-80% LTV loan from the bank, a 20-30% down payment, closing costs, CAPEX, operational capital, and reserves can still amount to a lot of money. Why not grab 10, 20, 50 people, everyone pitch in $50,000, and buy something much bigger and more efficient than each individual could buy themselves.
2. Leverage a syndicator’s expertise. You partner with someone who has years of knowledge, tons of experience, has developed professional relationships, and specializes in the asset class and business plan you are seeking to invest in.
Truly Passive investment
Real estate income is sometimes referred to as “mailbox money,” as in, you invest, sit back, and get mailed checks once a month. This is not the experience of a majority of real estate investors. Most people shy away from real estate investing because of the hard work and headaches. Syndication pairs skilled operators (general partners or GPs) with capital investors (limited partners or LPs). This provides the benefits of direct ownership to the LPs with absolutely none of the hassle. The “true mailbox money.”
Warren Buffett’s famous first rule of investing can be a tall order for someone getting started in REI with little knowledge and experience. Syndications in certain asset classes (i.e. commercial multifamily) have natural mitigation of risk built-in due to the asset class’s premium risk-adjusted return. Also, when investing as an LP in real estate, the limited partners are only held liable for their investment. That means these investments are protected against lawsuits, the recourse of non-payment of debt, or overall failure of the business.
Economies of Scale
Ever try to get some special attention from a property manager on one of your single-family rentals? Trust me when I say that just because this is fifth on the list, it does not take away from the power of this benefit. With syndication, you have a larger, more efficient deal. Having professional and sophisticated team players (property managers, asset managers, CPAs, securities lawyers, real estate attorneys, contractors, lenders, etc.) is not a luxury at the level- it is a requirement. Try paying for a lawyer to review your contracts and negotiations and a CPA to do your taxes at a smaller scale, and there goes all of your profit.
The things you should identify to get started…
Excellent Resources to Learn More
NOTE: This article should never be considered specific investment advice, legal counsel, or tax advice.
About the author: Bo is an active duty, Infantry Officer and values-based, real estate syndicator. He discovered the power in real-estate in 2015, and has been passionate about investing alongside his family and friends (both new and old) ever since. He is a long-term, buy and hold investor that has focused purchasing and operating commercial multifamily since 2018.
He can be reached at [email protected]