Find a real estate investor and loan them money to purchase and fix up a distressed property. This property needs to be discounted well below today’s market value. For example, lets take a home that is worth $100,000 when fixed up. The investor should only spend $70,000 between purchase and repairs on that property. The $30,000 is the investors profit and also covers any office overhead.
This is also your margin of safety as the lender. If things go south, you can take back the property and liquidate to recoup most, if not all, of your money. Only work with seasoned investors who can show you a portfolio of properties they have completed successfully. To further reduce risk, find an investor who will be placing a tenant in the property…the income from the tenant will cover property expenses (taxes, insurance, sewer bill), ensure you are paid out and also provide the investor with income: a win-win
- Pros: The money is not tied up as long as if you were going to own the property yourself and is generally more liquid. You get paid from the investor no matter if the property is occupied or vacant…just like a bank when a property is mortgage. You will earn a set, regular return and know exactly what that will be from day one. Also, your loan is secured against the property so your money is tied to a real asset unlike the stock market.
- Cons: You won’t earn as high of a rate of return as if you owned the property yourself because you are not leveraging your dollars with bank money. You aren’t taking advantage of the tax benefits of ownership.
Find a reputable turnkey real estate company. This company will find a property, rehab it, place tenants, and manage all the details for you. They will collect rents on your behalf and distribute them to you. You’ll actually own the property so you can use leverage to buy (aka get a bank loan), this will increase your cash on cash return. To further reduce risk find a turnkey provider that has lease option tenants, these tenants will take better care of the property so you are spending less on repairs and maintenance. They also default less on the rent than regular tenants because they have more skin in the game.
Only work with seasoned companies whose owners own real estate themselves. They should also be experienced managing many properties.
- Pros: You get the tax benefits of owning real estate – depreciation, ability to exchange the money tax free when you sell into another property, you can own in an LLC, and pay taxes after your expenses. You can leverage your money by combining it with a bank loan so you can own multiple properties. You don’t have to deal with finding the right property with a turnkey provider. They manage the rehab and any inspections. The turnkey company places the tenant. They handle rent collection and manage details and you receive distributions.
- Cons: You are paying a premium to a turnkey provider for not having any time involved. They are finding the property and selling to you at a markup. They will also take a % of the monthly rent collected, typically 10%. Your money is tied up in the deal, you’ll need to sell the property if you want your principal back so you need to be in it for the long haul. If something goes wrong on the property you’ll need to spend money to fix it up so make sure you have a reserve built up and your not spending your last dime to buy the house.