WHAT TYPE OF REAL ESTATE INVESTOR ARE YOU?
By Dugan P. Kelley
As a real estate investor, you may recall that President Franklin D. Roosevelt famously quipped, “Real estate cannot be lost or stolen, nor can it be carried away. Purchased with common sense, paid for in full, and managed with reasonable care, it is about the safest investment in the world.” In 2018, countless fortunes will be made in the arena of real-estate investing. If you are reading this, you are likely trying to determine what type of investor you will be in 2018.
Are you an active real estate investor?
Active real estate investors buy and manage their real estate holdings for income. They can also purchase real estate properties, renovate them and flip the same properties for a profit. Active real estate investors typically involve themselves in every aspect of the deal (selection, financing, and active management). Being an active investor requires effort, significant focus, and dedication. You will need to treat this like a job.
If you find that “control” is a significant factor for you in your personality, active investing may be the ideal ticket for you. Active investors have significant control, including in the selection of what type of real-estate investments to choose (single family, small multi-family, large multi-family, commercial or mixed-use buildings, or even industrial buildings.
While active investors have significant control, they also have to deal with all the problems that come with being an active investor. A couple of routine hurdles that active investors will have to deal with and overcome are: advertising and marketing to potential tenants; complaints from tenants; maintenance and repairs; and finding and using capital. Raiding your bank account for acquisitions or finding willing investors to come into the deal with you can often be the most complicated hurdle that active investors have to deal with. Most properties require at least 20% down and require personal guarantees.
Are you a passive real estate investor?
Passive real estate investors are not active. They earn a portion of the monthly revenues as “passive” income for as long as they own the investment. Passive investors have no obligation to select, manage, repair, or deal with any of the problems in connection with the real properties.
Many passive real estate investors invest with sponsors (who syndicate real-estate transactions) that accept private placements or with a private equity group, mutual funds focused in real-estate, or real estate investment trusts (REITs). The common theme with all these passive investments, is that someone else is managing the investment for you. While passive investors have little (or no) say in how the investment is managed or even whether it gets sold, you have no headaches. Typical investment amounts are completely variable and can run the gamut (from a few thousand to millions).
Typical passive investments are usually in large properties because relatively small investments, like single-family homes or small apartment units many not require the need for outside capital investments because traditional lending sources will easily lend money for these acquisitions. However, large apartment buildings and properties often require investors to secure the properties and obtain financing/funding.
Passive investing in real estate has many benefits, including giving you freedom. You will enjoy the freedom to travel. Passive investors enjoy freedom from the hassles of management, responsibility, repairs, or tenant complaints. If you are a passive investor, make sure to surround yourself with a good team of advisors and professionals to help you choose your investments.
Are you a blend of the two types of real estate investor?
Crowdfunding is a practice that has exploded in recent years in the real-estate arena, where real-estate projects are acquired by raising many small amounts of money from a large number of people, typically via the Internet. In 2015, several studies have estimated that over $34 billion was raised with crowdfunding.
Crowdfunding is regulated by the SEC, and provided that you are an accredited investor, it can provide you with a blend between the passive and active investor profiles. Crowdfunding provides the benefits of passive investing, in that the property is professionally managed and investors don’t have to lift a finger to collect profits. However, it also provides investors the ability to actively select the investment properties. Crowdfunding is managed through a portal where due diligence is performed on the properties, the sponsor, and can give the investor the type of controls that many investors equate with active investing.
Take that next step and become a real estate investor.
Regardless of whether you are an active investor, passive investor, or wondering if Crowdfunding is appropriate for you, you need to assemble an experienced team around you. At Kelley Clarke PC our team of attorneys and professionals can assist you weighing your options and assisting you with due diligence in these matters.
Dugan Kelley is a Shareholder in Kelley Clarke PLLC and has written several articles on real estate law and investing. Read those articles and more at the Kelley Clarke PLLC blog.