Investors, who are new to real estate frequently ask the same thing: should I invest in multi-family properties with four or fewer units, or should I collaborate with experienced apartment building investors on various projects? What should I do? Is this the right step? What if I’m making a huge mistake?
These investors weigh the benefits of investing directly vs. collaborating with a professional investor and the danger of putting most of their wealth in a single transaction.
The answer to this problem has shifted substantially in recent years. Before regulation changes, unless you knew the proper people (or were a member of the right country club,’ you were barred from investing in anything other than what you could personally afford.
Now that the laws are different, you have a plethora of possibilities.
Consider the following three factors:
A liability is something you owe, usually a monetary amount. Liabilities are resolved over time by transferring benefits like money, products, or services.
Liabilities on the balance sheet include loans, accounts payable, mortgages, delayed revenues, bonds, warranties, and accumulated expenses.
Generally, liability is an unfinished or unpaid obligation between parties. A financial liability is also a commitment in the world of accounting. Still, it is defined by previous business transactions, events, sales, or anything that would offer economic gain at a later date. Current obligations are typically considered short-term (due in 12 months or less), and non-current liabilities are considered long-term.
Based on their timeliness, liabilities are classed as current or non-current. They can be a prospective service owed to others (short-term or long-term borrowing from banks, individuals, or other institutions) or a due obligation from a past transaction.
When you utilize all of your funds as a down payment on a local project, you are putting that cash at risk and exposing yourself to considerably more liability. Why? Because you will certainly be requested to guarantee the bank loan, if you fail to make payments, the bank will pursue you for the debt you owe them.
During the 2008/09 downturn, I directly handled over $1 billion in these types of defaulted loans, and smaller investors were heavily affected. Tenants who lose their employment cease paying their rent, requiring you to evict them. It was a time-consuming and expensive process, not to mention mentally draining. You will be litigating against people you may have grown to like and trust but whose personal circumstances are beyond their control.
The main problem is that the bank will be less merciful than you – they have shareholders and federal authorities on their tails. So as you dally with lawsuits evicting a family whose breadwinner lost their job, the bank insists you keep the mortgage.
The most likely method to create steady and long-term money in real estate is to go through some hard knocks. And if you are against it, it’s because you haven’t learned that lesson yet.
The housing market is cyclical. Values will fall, and you must plan for this eventuality.
This is how you do it.
* Run best, worst, and most likely scenarios on all of your estimates to stress test your hypotheses.
* Keep your debt low and always take out debt with long maturities, even if the interest rates are more significant than shorter-term loans because this will protect you from refinancing during a slump.
Before the regulatory reforms (about which I wrote a book, Leaders of the Crowd), you had to put all your money into one contract to get started. Because of the emergence of real estate crowdfunding, you can now spend a smaller amount on various projects.
You can research developers and crowdfunding platforms online and invest in the type of real estate you want to buy. Still, instead of putting all your eggs in one basket, you can invest a lesser portion in projects in diverse geographical locations, with various demographics, and functioned by multiple occupational development companies.
You effectively become a shareholder in their development companies, which entails the following benefits:
* You continue to profit from rents.
* You have no financial risk other than the money you invest.
* You have no management responsibilities so that you may devote your time to your day job and family.
* If one property underperforms, it could/should be compensated by others in various places you invest in.
* You can invest with [Read: collaborate with] the most outstanding developers in the country, whose projects benefit from economies of scale.
* To protect your investment, you must do your homework before investing by reviewing the developer’s due diligence – you don’t have to undertake the due diligence yourself. (Remember that the best way to get out of a terrible transaction is to avoid it first.)
You have two ways to invest in real estate: become a developer or partner with one. This option did not become available before regulatory developments allowed developers/sponsors to advertise online.
In either case, you must learn what it takes to engage in real estate – the financial terms, management challenges, and adequate due diligence – and the primary difference between partnering with or becoming a developer is how you apply what you learn.
Keep up with real estate industry news and use tools like real estate blogs and podcasts to understand new selling and marketing tactics. If you follow these steps, you’ll be well-prepared to deal with your real estate journey effectively.
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Come join us! Email me at mark@dolphinpi.us to find out more about our next real estate investment.