The Two Ways to Buy Real Estate

Source: https://www.nreionline.com/finance-investment/cre-defies-rising-tide-global-debt-levels

Two Ways?? Hold Up. How are there only two ways? With so many out there sharing so many ideas on how to buy or invest in real estate, it can quickly feel like you are stepping into this —

Source: https://www.videoblocks.com/video/night-flight-inside-a-cockpit-flying-in-the-sky-with-moon-stars-and-moving-clouds-rkug6-limsodh4r

— and quickly become discouraged or overwhelmed. With so many options, avenues, and vehicles, it is important to keep things straightforward and simple.

For me, the only two ways to buy real estate are directly, or actively, and indirectly, or passively.

The main difference between the two? How much time, energy, and effort is required of you, the investor, to:

• Find the deal.
• Fund the deal.
• Acquire the deal.
• Manage the deal.
• Maintain the deal.
• Improve the deal.
• And lastly — exit the deal.

The goal is a balance between the highest return with the least amount of time and energy needed to achieve that. Now there are sub-categories in both of these Macro-categories.

Directly : (Active)

1. Sole Proprietor — this is the one man band. The lone wolfpack. The traditional way of buying real estate. They get all the reward, bear the brunt of the risk, and deal with all the headaches and decisions. Even if you get a property manager, who does the property manager report to? The owner aka you. The Pros: High returns. The Cons? Usually, the amount of time and energy required is severely underestimated resulting in a second job being taken on by the unbeknownst sole proprietor, purchasing power is greatly limited, deploying capital takes long periods of time, and the risk of making a mistake is high.
2. Partnership — This is when 2 or more engage in a real estate deal. There may be a General Partner and a mix of quasi-limited partners, or a general manager/principal. While giving up some of the return, you spread out your risk, increase your purchasing power, have room to delegate responsibilities, decrease the timelapse between raising capital and deploying it into real estate. The Cons? Still requires time, energy, and effort on your part (read: the second job), still room for error depending on partners, requires a lot of trust, no guarantee for a quick turn around on capital.

Indirectly: (Passive)

1. REITs (Real Estate Investment Trust)/ Real Estate Mutual Funds / Real Estate ETFS — This is a stock in a publicly traded company that acquires real estate. They usually have diverse portfolios, large assets, share returns in the form of dividends to investors, leverage the expertise of a highly sophisticated company, and your involvement in the actual deals is 0. The Cons? It is a stock, not real estate. You are a shareholder in a company publicly traded on wall street, very different than a shareholder in a piece of real estate. Thus, stock prices can be highly dependent on the stock market overall (outside your control), no tax advantages that come with owning real estate (still at the whims of capital gains tax), investor payments are made out quarterly, sometimes longer.
2. Crowdfunding/syndication — This is where REIT and actual owner collide. Typically a low barrier to entry, allows investors to invest in assets out of state or internationally and opens them to opportunities they wouldn’t come across, you are an actual owner in the deal, you leverage the expertise of a team of professional people, your involvement is 0. The Cons? They rarely have any skin in the game. They are simply receiving a fee for managing the deal. Many are in support of this model, for me personally it is hard for me to invest in something that the one selling it to me isn’t financially vested in themselves.
3. Silent and/or Limited Partner — these are the private equity funds, the large capital raising companies, who upon completion of raising their funds acquire real estate. This is truly passive investing (the actual meaning of the phrase) with all the benefits of owning real estate. However, not all funds are the same. A) They have a high barrier to entry, many times only working with high net worth individuals or SEC accredited investors. Something(s) to know — will they allow an everyday person to invest? If so, what is the minimum and maximum contribution? B) How much stake do they have in the deal? C) what is the expected return and splits? D) Do they themselves buy the asset first and then back into via capital raising? E) How often are payments disbursed to investors? Why?

I am a commercial real estate broker in Dallas, TX. Our firm provides a professional platform for both sophisticated groups and everyday investors to buy and sell commercial real estate. If you are looking to acquire commercial real estate in the DFW market, either directly or indirectly, we have a team uncovering interesting off-market opportunities every day. Reach out to our team at bielpartners.com and set up a time to meet with us in person or over the phone.

Talk soon,

Mitchell