The thought of getting in at the top of any market can make an investor anxious, especially the pandemic fueled residential real estate market. However, like the stock market, timing the tops and bottoms is difficult, and if you wait on the sideline for the next dip you may miss the next big move. The proliferation of work at home jobs and the FOMO, the fear of missing out, have pushed real estate sales to new highs.
If you’re looking to add real estate to your investment portfolio you have options. Your first thought might be one that harbingers visions of a landlord you once had that had to deal with everything from rats in the toilet (yes, that actually happened to me) to trees falling on the family room over the garage. These thoughts can be unappealing and can lead one to forgo owning a rental property and managing it. However, buying a rental property is not the only form of ownership you can use. The advent of companies such as Airbnb have literally opened the door to how your property can be utilized for passive investment. It doesn’t have to be the traditional 12 month lease term, as short term rentals for as little as one night take place. The passive nature of this type of real estate investment is also taxed as ordinary income. However, you can deduct your mortgage interest and other expenses as well as depreciation. Never fear, if being a landlord still doesn’t float your boat, there are other options.
The possibility of flipping investment properties can get you into the residential real estate game without having to be a landlord. You’ve probably seen the myriad of television shows on HGTV and other networks showing how people try to find an undervalued property, knock out a couple of walls to open up the place, and then resell it as quickly as possible for a profit. This too isn’t for the faint of heart. If you’re like me and don’t know the difference between a Philips head screw driver and a regular one, think long and hard before you get into house flipping. According to David Meyer, vice president of growth and marketing at Alexy Realty Group in Raleigh, NC, “There is a bigger element of risk, because so much of the math behind flipping requires a very accurate estimate of how much repairs are going to cost, which is not an easy thing to do.”
So if you’re like me and don’t want to get your hands dirty, investing in real estate through a publicly traded REIT might be an option. As you probably know, REIT’s allow you to invest without actually owning the physical property. Often compared to mutual funds, they’re companies that own commercial real estate such as office buildings, retail spaces, apartments and hotels. REIT’s tend to have high dividend payments because they are required to pay out at least 90% of their net income to investors. If the REIT does this it won’t have to pay corporate taxes. Unlike owning rental property yourself, the REIT gives you liquidity and is as easy to get in and out of as a mutual fund or ETF.
Let’s dive into the real estate acronyms a little deeper. Have you heard of RELP’s? That stands for Real Estate Limited Partnerships, which are structured similarly to hedge funds, where there are limited partners (investors) and a general partner (the manager). The general partner is typically a real estate business that takes on all liability. RELP’s are another form of passive income and can be a very profitable investment if you select the right general partner. However, your investment is entirely an arms-length transaction, where you are totally dependent on the expertise of that partner, who makes all the investment decisions.
If you venture off the beaten path a little you can find more esoteric opportunities. Similar to online lenders like LendingClub and others, there are also platforms where one can go to get involved in financing real estate projects. These sites will typically bring developers and potential investors together. Developers will get the funds they need, either in debt or equity, and the investor will receive income, as well as potential appreciation of the investment. Note that these are highly illiquid and are usually limited to accredited investors. Don’t fret, there are a number of growing platforms that let the average investor play, including Fundrise and RealtyMogul, and other crowdfunding sites.
Even as the residential real estate market is hitting new highs in just about every category, the above mentioned investment ideas give you a way to enter the market. Perhaps dollar-cost averaging in to a vehicle like a real estate mutual fund or ETF is the way to go. This will allow you to buy in at different price points in the future to hedge against putting everything in at one time and have that one time be the market top. Good luck!
