“Whatever is worth doing at all is worth doing well.”
–Philip Stanhope
If you ask us, there is no such thing as a lazy investment. There’s a misconception that passive investments are the lazy way to invest in real estate, and yet even those require some effort and coordination. The truth is that there is going to be management involved, no matter how you choose to invest—yet the rewards are well worth the effort.
As you embark on the journey of real estate investing, it’s vital that you remember that it’s okay to start small. You don’t need a dozen deals in the books to be valid. In fact, you’re more likely to learn good habits and strategies if you start small. And, you’re less likely to get overwhelmed if you take your time.
Take on help where you can, or grab a mentor who can guide you through the process. Once you’ve your first deal under your belt, it will become easier to move forward with more investments.
If you’re still unsure, let’s look at the different types of real estate investments, so you can find something that speaks to you
Ten Types of Real Estate Investments
1. Rental Homes
This option is ideal for new investors, especially if you’ve been a homeowner before. Getting started isn’t so different from buying a home, and if you’re moving, you can even rent out your old home instead of selling. This is a great way to make the transition, since you already own the property.
Whichever route you take, don’t neglect the math! One of the rookie mistakes we see is an over-reliance on appreciation, without properly assessing cashflow. Instead, think of your monthly cashflow like the cake, and appreciation is the icing. This way you’re not blindsided by underperformance.
2. Commercial Rental
Perhaps most similar to residential real estate is commercial real estate. The buying and renting process is the same, yet you rent to companies rather than individuals. Office buildings, warehouses, and storefronts are common commercial renters.
You can expect higher startup costs for commercial investing, and a fickle market, which is why it’s important to diversify your real estate portfolio. Sometimes commercial properties can sit for a while before you find a suitable renter. And other times, a once “hot” neighborhood can go cold in weeks.
This type of investment may be less suitable for a first property, and investors with mid to high experience will see the best results.
3. Commercial Bridge Loans
Maybe you’re familiar with residential bridge loans: temporary financing tools that allow a homeowner buying their next home to access the equity in their existing home until they can sell it. Commercial properties are much the same, and the temporary financing allows for a property to establish an income history, be improved or be rehabbed.
As the investor, you’re technically a “private lender.” By working with other lenders, you can put some of your “lazy” assets to work and make sizeable returns.
4. Apartment Buildings
Consider these the “gold standard.” With apartment buildings, you have the opportunity to provide housing and earn a higher return than single-family homes. A well-managed building in a favorable area can earn you consistent income in the double-digits. And there are some nice tax-advantages and the potential for future appreciation.
The downside is that it’s not a beginner’s game. The up-front investment is typically more than a home rental, and without the proper management experience (or help) it can be a nightmare. As a landlord, certain responsibilities are on your shoulders, and more tenants only increases those responsibilities. This is where having a team can be helpful, especially if you’re looking for the “lazy” way to invest in real estate.
5. Equity Investing
In most cases, equity investing requires you to be an Accredited Investor—which means you have either a Net Worth of $1 million (excluding your primary residence), or have an annual income $200,000 each year for the last two years. $300,000 if you’re married.
This is not an option for beginners, however a diversified portfolio can help put you on the right path. Equity investing allows you to invest passively—without needing to find, purchase, rehab, or manage properties—while also offering a fractional share of the equity.
6. House “Flipping”
If you’ve watched HGTV, you’re probably familiar with house flipping. They make it look easy and fun, although it’s actually quite labor-intensive. If you’re doing the work yourself, you have to factor in your own time and effort. And if you’re not the handyman you want to be, hiring a suitable contractor can be pricy.
This type of investment carries big risks because the market can go sideways quickly, and renovations are time consuming. And then there’s the harsh truth about “reality show math.” Often, TV shows neglect to include interest costs, lending costs, or closing costs.
If the idea of renovation interests you, consider buying a fixer-upper and renting it out yourself. You’ll be able to recoup the mortgage costs, and likely charge more for the improvements. In the long run, you’ll have better cashflow then if you just sold the house.
7. Lease-to-own Homes
In markets with depressed housing prices, lease-to-own can be a successful strategy. To investors who are willing to learn how to do it well, it offers unique advantages.
Lease-to-own strategies combine short and long-term profits. And landlord responsibilities are actually decreased, because the tenants are hopeful homeowners who are willing to treat it like their own place. They’re incentivized to assume maintenance responsibilities and tasks.
For the up-front learning curve, this can have long-term benefits for investors who would prefer to have a reduced responsibility as a landlord.
8. REITs
Real Estate Investment Trusts are popular because of the ease of investment. In most cases, they function like a mutual fund or a private equity fund, and are much more “hands-off.” If you’re looking for a lazy way to invest in real estate, REITs are a decent solution.
However it’s important to look at the downsides. REITs can perform poorly in a down economy, much like mutual funds. In 2008, commercial property REITs dropped 49% in value, and mortgage REITs dropped 42%.
While REITs are certainly one of the most “lazy” ways to invest in real estate, the risks are higher than most other options.
9. Land
While land is very “hands-off,” it doesn’t typically produce cashflow unless it’s being leased. Campgrounds, farms, and oil and gas exploration are the most common land leases. Without a lease lined up, it’s a highly speculative investment, and investors often buy out of hope that prices will rise. Meanwhile, they’re paying property taxes.
We recommend land leases over raw land, to cut back on speculation and increase cashflow.
10. Part-time Rentals
It’s 2020, you’ve probably heard of, or used, Airbnb or VRBO. And if you’ve used them, you probably like to travel. See where we’re going with this?
If you live in an area with some travel appeal, consider renting it through Airbnb when you’re away. Even if you’re not in a tourist-heavy area, you never what’ll bring people to your area. This can be a great way to increase your cashflow, effectively eliminate your mortgage, or even fund your own trips. (And for those worried, there are plenty of ways to protect your possessions.)
Additionally, you could buy a second home or apartment in a hot destination and rent it out through one of these platforms. There’s plenty of opportunity for both self-management and outsourced management. And because renters are paying by the night, you have the potential to make more money than you would through monthly rent.
Be sure to check your area’s Airbnb restrictions–some cities are limiting options so that they don’t run out of local housing.
Ditch the Lazy Way to Invest in Real Estate
Everyone wants the “get rich quick” option, yet so few things in life pan out that way. If you’re interested in easy investments, real estate may not be for you. However, the alternatives don’t necessarily make better investments. Stocks, bonds, and mutual funds are some of the most accessible and heavily utilized investments thanks to typical financial education—yet who do you know who made their fortune through stocks?
It’s important to consider that complicated doesn’t mean bad—and once you’ve gotten the hang of things, real estate won’t feel as intimidating. Maybe it’s not the right investment for you—ultimately that’s up to you to decide—just don’t discredit it because of the work involved.
And if investing in something with a bit more effort leaves you feeling nervous, consider this:
- Unlike stocks and bonds, real estate investments are secured by real physical assets. Even in a down economy, stocks won’t drop to zero in a matter of months like Enron did in 2001.
- Lenders frequently lend from 75-100% on real estate. Ask your banker what they would lend you with your IRA as collateral.
- Your properties are insured. Even in most worst-case scenarios—floods, fires, or storms—you’re likely covered. How many of your assets have that same protection?
- You don’t have to make an instant switch. Some real estate investments can happen with as little as $25k, which means you can keep your other investments when you start out. You can even keep some indefinitely! It’s up to you. However starting small will allow you to gain confidence in the process as those first checks roll in. Then, you can decide your next move.
So maybe there’s no lazy way to invest in real estate. However, the opportunity is ample. If you’re interested in taking the first small step, a Prosperity Economics Advisor can help you figure out where to start.
