5 Ways to Become an Active or Passive Real Estate Investor

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Hey everyone. And welcome back to the money girl podcast. My name is Laura Adams. I’m a personal finance expert. Who’s been hosting the show since 2008. I’m also the author of several books, including my most recent title, which was a number one, Amazon new release called smart solopreneur, a personal finance system for freelancers entrepreneurs and side hustlers. So if you are building a business this year, or maybe you wanna earn more income, I hope you’ll grab a copy. You can get it as a paper book, ebook or audiobook, and if you’re loving the money girl podcast, it would mean so much. If you take a moment and give back by submitting a quick rating and review in apple podcasts or any other app that you’re using, that’s the best way to let new listeners know what the show is about. So I wanna thank you in advance for taking a moment to do that.

You can also connect on Twitter at Laura Adams or on Instagram, Laura D. Adams, and [email protected] is where you can sign up for my email updates, which make you eligible to access my full library of financial tools and resources for free. My mission here on the show is to help you get the knowledge and motivation to prioritize your finance, build wealth and have more security and less stress. Every show is created to make sure you come away with practical advice and tips that will help you make better money decisions and hopefully take your financial life to the next level. So I’m so glad that you’re here and your time is so valuable to me. I wanna make sure that it’s the show is just jam packed with information for you. Also, if you hear something in the show and you wanna go back and learn a little bit more about it, you will find a companion blog post for every episode in the money girl [email protected] today’s episode is number 715 called five ways to become an active or passive real estate investor.

This show is inspired by several recent questions I’ve received from listeners about real estate. You guys are really getting interested in investing and just questions about owning real estate in general. So I’m gonna highlight two questions today that I think will apply to the most people. Real estate is something that’s really near and dear to my heart. It’s just truly in my blood. My dad was in real estate when he was early in his career. My grandmother, my mother’s mother was in real state for many decades and was super successful, not only as an agent, but also as a local investor in her small town in Summerville, South Carolina. And so I just learned a lot from, you know, being around those folks and, and seeing how they handled real estate, you know, their attitudes and emotions about it also. So my husband’s father was a real estate appraiser and broker in Florida for decades.

He actually got a real estate degree from Stetson in Florida. It was one of like the first real estate degrees that were, you know, ever issued. And he was a real estate appraiser with the license number, like 0, 0 1. He had the very first real estate appraiser license in the state. So when I tell you that it’s truly in my blood and my husband’s blood, I mean it, so this is something that, you know, I want to make sure everybody gets a lot of exposure to. So we’ll cover the first question that came in from Julie S says, hi, Laura, I recently discovered your podcast and have already binged a ton of episodes and learned a lot. Thanks for all you do. One of my new year’s resolutions is to be more mindful and strategic about my finances and your podcast has been super helpful. I would love it.

If you could podcast on the trend of buying a second home first, where you rent your primary residents and buy a second home for vacations or to rent out, I’ve been considering this. And wondering if your guidance such as not spending more than 25 to 30% of your income on housing would be different for an investment property, because I would definitely Surpas that amount. So can I afford it also, I’ve heard that lenders don’t like giving mortgages for investment properties as much as primary residences, Julie, this is a great question. I’m so thrilled that you’re getting so much value from the show, and I’m really glad that you’re in the community. So we’re gonna get to your question. And Kimberly C also sent in a question. She says, I’m a young professional starting my financial journey, and I’ve loved learning from your podcasts. One of my financial goals is to make passive income.

You mentioned that you own some rental properties. Can you share your journey with how you obtained your first rental property and any tips you have for someone who wants to invest in real estate? Kimberly, great question. Thank you so much. And I’m also glad to know that you’re in the community and getting so much from the podcast. So this show will answer these great questions and I’m going to review five ways. You can invest in real estate, actively or passively creating an additional income stream from real estate. Doesn’t have to be difficult. It doesn’t have to be time consuming, nor does it need to require any special knowledge. So if this sounds interesting to you stay with me, one of the reasons I real estate is that it’s just such a unique asset class. You know, not only does it give you a place to live or vacation, but it also gives you the opportunity for investment growth, through price appreciation and investment income.

So that’s why every investor should have some amount of real estate in their investment portfolio and figuring out what’s the right amount for you will, you know, will vary a little bit, uh, from person to person. And, you know, I’d say if you think that you’ve got to shell out a lot of money to buy property, you may be surprised that there are some really simple ways to own real estate without a significant investment of money or to, so let’s get into five ways to become an active or passive real estate investor. So the first way to invest in real estate that, you know, might sound a little obvious, but I think when you dig into this concept, you may buy into it a little bit more, but the first way is to own your own home. So if you think that being a home is not an investment, I want you to think again, not only does it shelter you, but buying an affordable home is a terrific investment.

One of the best real estate tips I can give you is to buy the least expensive home in a neighborhood, a significant factor in how much a home’s value can go up is the surrounding homes in the area. So here’s an example. If you bought a house for $300,000 and it appreciates 3% per year, which is pretty modest, you would have a $600,000 home in 30 years. Again, that’s a very conservative estimate on how much real estate could appreciate over years. Another great part of owning a home is building equity, as you pay down your mortgage. So each monthly payment consists of two parts. It’s a principle portion and an interest portion. And, and this is if you’ve got a fixed rate mortgage, uh, but the ratio of principle and interest adjusts every month. So in the beginning of your fixed rate mortgage, your payment is mainly interest.

So this is just how amortization works and you pay slightly less interest and slightly more principle each month, as you move through your, you know, your amortization schedule. So as you’re slowly paying down your original mortgage balance over time, you increase your home equity a little bit. Now this is only true. If your home’s value is steady or increasing, going back to my previous example, if you bought a $300,000 home, and let’s say you put 5% down, you’d have $15,000 in equity in that home on day one, you would’ve put down $15,000. So, you know, on day one, that’s your equity. But if your home appreciates to a market value of $600,000 after paying off your 30 year mortgage, you would have $6,000 in equity, quite an investment. And again, that’s quite conservative. So don’t underestimate the fact that if you are a homeowner, that is an investment, you know, don’t feel like you need additional exposure to real estate.

If real estate, you know, is not your thing. Now, if it is your thing and you really wanna learn more and you, you want to, uh, become more of an investor in real estate, stay with me. I’m gonna, you know, keep kind of going through more options for you to either get involved actively or passively. All right, the second way to invest in real estate is become a landlord. When most people think about becoming a real estate investor, this is what they think about. They probably think about owning one or more properties to rent out. You might buy single family or multi-family homes on your own, or even with a partner. And this is as an active investor. This strategy requires a significant amount of upfront capital. You’ve got a down payment, you’ve got needed, re payers, you’ve got vacancies, you’ve gotta cover all of those financial needs.

And in addition to being capital heavy managing properties and dealing with tenants is not for everyone. I started investing in real estate as a doit yourself landlord decades ago, after dealing with tenants who didn’t pay rent, disappeared and left behind a house, filled with junk, set the kitchen on fire in the middle of the night. These were all true stories. I decided to let a professional manager take over the hassles. And I would say turning over my rentals to a property manager was one of the best decisions I made as a landlord because they raised the rents to higher market values and actually screen potential tenants much better than I could. A good property manager, typically charges 10% of your gross rent per property, or maybe a little less if you’ve got multiple properties to give them. So unless you’ve got the patience skills and knowledge to manage tenants, I want you to factor in the cost of property management into your analysis.

If you can find undervalued properties that are likely to appreciate and provide net cash flow after expenses, they can be excellent investments and many costs such as repairs and maintenance are or tax deductible offsetting your rental income. Just remember that you’re gonna need landlord insurance and healthy cash reserve to cover unexpected repairs and months of potential vacancies. If you know, an experienced real estate investor, consider partnering with them, that could be a great way to share income share expenses, and also to learn the business and understand how to analyze potential deals. You know, a little bit more carefully instead of having to do it by trial and error. Another tip is to work with an experienced real date agent. Who’s got extensive experience buying and managing rental properties. It really is a niche. Um, so you need to seek out somebody who is, you know, doing deals, uh, as investment properties frequently.

There’s just no substitute for having a local expert on your side, who understands the market where you’re considering an investing. One strategy is to consider buying a multifamily property that could be a duplex, a triplex, or even a small apartment building. If you’re willing to be an onsite landlord, you could live in one unit and rent out the others, or you might specialize in commercial properties, such as renting out retail, building warehouse or office space. Commercial property is generally more expensive and the leases are more complex than residential, but these properties can appreciate faster than residential investments, depending on the location and features. However, business tenants want stability and they’re willing to sign multi year contracts with rent, escalation and commercial tenants are typically responsible for things like renovations. Uh, they also pay property taxes, insurance, and maintenance. So they take care of a lot more of the expenses, but everything in real estate is negotiable. In addition, you can even structure a commercial lease to pay you a percentage of the tenants business profits. But if the business fails or the economy isn’t doing well, you can have difficulty keeping a commercial tenant and end up with a vacant building and a hefty monthly payment. I have been there. I’ve had a commercial property that stayed empty for many, many months until we found the right business to move in. So becoming a commercial landlord is definitely for those with more experience or those who can take on higher risks.

Now let’s go back to Julie’s question about buying a second home. First, when you purchase a vacation or investment property that not be your primary residents, lenders typically require at least a 20% down payment. It could even be, you know, higher than that. It could be 25 or 30%. Plus they usually have stricter underwriting requirements for your income and your credit compared to buying a home that you plan to live in. So Julie, whether you can forward a vacation home, depends on what you plan to do with it. And of course your finances, if you were to turn it into a short term rental, like a Airbnb, be aware that you typically must collect and remit additional taxes, such as occupancy and sales tax. You gotta remit that to local and state governments in many jurisdictions and managing a short term rental on your own could be a significant time commitment.

So my recommendation is that unless your finances are in great shape, buying a vacation home is probably too much a stretch on your budget. For instance, do you have a healthy cash reserve equal to at least three months worth of your living expenses? Are you investing at least 10% of your pretax income for retirement? And have you eliminated any high interest debt? Julie, if you check the boxes on those financial fundamentals, buying a second, a home first, maybe an excellent investment for you. If owning it would provide an extra income stream or just improve your lifestyle, I’d start doing your homework. Be sure to speak to a tax professional about tax obligations for short and long term rental income so that you can factor that to your decision. Now let’s address Kimberly’s question about creating passive income. First off, I want you to remember that most mainstream investments such as index funds exchange traded funds. And as I mentioned, being a homeowner are passive. You don’t have to buy rental properties to create.

I started investing in real estate by keeping my first home instead of selling it. When my husband and I moved into a larger home, that’s the easiest way to become a real estate investor. You just move out and stick a four rent sign in the yard. Not only is it easier to rent out your old home and buy an another one, but it’s less expensive than financing a new investment property. As I mentioned, getting a mortgage for a non-owner occupied property requires a larger down payment and typically comes with a higher interest rate than for a home you’ll occupy. Just be sure that your existing mortgage lender allows you to convert your resident into an investment property without paying a penalty or refinancing into a more expensive non-owner occupied loan. Be aware that once you switch your insurance from a regular homeowner’s policy to a landlord or a commercial policy, the lender is gonna know that you don’t live there anymore.

So be sure to read your mortgage or call your lender and make sure you understand what’s allowed. However, if you want to buy a rental property, you’ve got to do a precise analysis to ensure the going rent will cover all your expenses. If you break, even your tenant is paying for your investment, which is fantastic. And if you’ve got leftover profit, you’re generating a positive cash. And if you keep a rental property long enough to pay it off, your net income will be mostly profit. My biggest piece of advice is never to assume that you will have rent income every month. I’ve had rental properties that were vacant for long periods. You quickly get into negative cash flow territory. If you’ve also got unexpected repairs and maintenance after a tenant moves out. So if a rental property cash flow roller is not a ride that you wanna take, don’t worry.

I’m gonna cover passive ownership options in just a moment. All right, the third way to invest in real estate is fix and flip houses. If you love shows on HGTV like flip or flop, you may think that rehabbing investment properties looks easy. And if you’re as handy as chip and Joanna Gaines, the hosts of fixer upper remodeling homes, maybe your jam. The idea is to find an undervalued property in a great area that needs many updates, and I’ve done several house flips. It can tell you that knowing what a remodel will cost is more art than science. I was in the floor covering business for many years, and you just never know what’s under an existing floor until you take it out. In other words, to account for many structural and financial unknowns, you’ve got to buy a home well below its fixed up market value to make sufficient profit.

You’ve gotta estimate renovation call like a pro. And it helps if you can do some of the renovation work yourself. So flipping houses is the most active form of real estate investing because you become a full-time project manager and, or supervising multiple trades at once. If you decide to become a real estate flipper, always get a thorough home home inspection. So you understand any invisible potential costs. Be very clear about estimated expenses, the properties, potential market value and how long it’s gonna take to sell. After the renovations are complete. Working with an experience, partner can be one way to avoid missing the mark. So you come away with some profit for your time and effort. All right, the fourth way to invest in real estate is invest in real estate funds. All right? So we’re getting into the passive side. Now buying funds that own properties is an indirect or passive way to invest in real estate.

You might choose a mutual fund or an extra change traded fund or ETF that invests in the shares of companies in the real estate business like builders and material suppliers that gives you exposure to potential real estate growth without owning it directly. Another option is investing in real estate, investment trusts or REITs, R E I T. The, these companies invest in income producing real estate and they pay out regular dividends. For instance, they may own vacation properties, hotels, apartments, healthcare facilities, office buildings, retail centers, self storage, and warehouses. You get real estate income without having to buy, manage renovate or finance any property yourself. All right. And the last way to invest in real estate is to use real estate investing platforms. If you’re like Kimberly, and you want passive real estate income, but you don’t want the hassles of tenants, renovations or risks of losing money by trial and error, check out online investing platforms.

There are some excellent options that allow you to put your money into residential and commercial real estate without getting your hands dirty. And I’m gonna cover five of them here. And again, these will all be linked up in the show notes in the money girls [email protected] All right, the first is awning. This is a real estate brokerage that helps individuals invest in single family rentals nationwide. Here’s how it works. You get paired with a dedicated advisor who identifies roles and assist you in negotiating offers, setting terms, completing inspections, finding financing, and closing deals. Remotely awning can even handle your property using their vetted local property managers, giving you passive income. And here’s the best part. They don’t charge buyers, but they earn commission from sellers. This is, you know, how brokerages typically work that makes it a fantastic service for any potential investor. Another option is divers a fund.

They make it easy for anyone who wants to build wealth by buying shares in a portfolio of high value multi-family estate. You can diversify your investment portfolio, just like the ultra wealthy, but without any net worth restrictions. So in other words, you do not have to be an accredited investor to use this service. You can start investing with as little as $500. So this is, you know, a great way to get into commercial real estate. If that’s something that you’re interested in, all right, the next platform is called equity. Multiple. They allow individuals to invest in professionally manage commercial real estate with as little as $5,000. They offer three investing approaches, including diversified real estate funds, direct investing in targeted properties and a savings alternative for funding short term, real estate notes. So equity multiples, giving you some more sophisticated options to get involved with commercial real estate.

The next platform is crowd street. This is for accredited individuals and, and it gives you access to a range of institutional quality commercial real estate opportunities. So whether you’re a real estate newbie or a seasoned expert, crown street makes it easy to diversify your portfolio with investment funds that will get you involved in multiple properties. You can do individual deals or even a professionally managed portfolio. You can create a free account and browse there available deals. And basically being accredited means you’ve got to have net worth over a certain amount. So, uh, you can learn more on their, and the last option is Realty mogul. They give individuals access to institutional quality real estate deals, including specific properties and REITs, those real estate investment trusts that I mentioned to create passive income for investors. So whether your goal is to diversify your I, or create extra passive income, you can own real estate directly or indirectly through these platforms.

I just covered. Just be sure to spend some time researching these platforms and their available deals to know which investment approach may be right for you before we go, I wanna invite you to do Wayne, my free private Facebook group called dominate your dollars. It’s a fantastic group of people who are asking great questions, helping each other and reaching their financial goals for 2022. Just search for the group on Facebook. Again, it’s dominate your dollars and you can also visit Laura D adams.com where you’ll find my contact page and more about me, my books, and online courses, and get bonus content and resources. When you sign up for my newsletter updates, that’s all for now. I’ll talk to you next week until then here’s to living a richer life. Money girl is a quick and dirty tips podcast. It’s audio engineered by Ricky Berg with editing by Adam Cecil. Our operations and editorial manager is Michelle Marus. Our assistant manager is Emily Miller and our marketing and publicity assistant is Devina Tomlin

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