Over the last nearly 20 years I have helped hundreds of clients direct countless dollars into all types of investments. My experience with all those investors taught me that to be successful in investing and above all else, you need to know yourself. Nowhere is this truer than when it comes to investing in real estate.
Two Paths to Follow
Real Estate investing is interesting because there are so many ways to do it. From direct individual investment, to pooled ownership, to private placements and more, real estate investment vehicles are more plentiful than Baskin Robins flavors of ice cream. Herein lies the challenge for investors; which way to go? I’ll break real estate investment options down into two categories: securities offerings and non-securities.
Real Estate Securities are an investment of money or assets that has an expectation of profits and is part of a common enterprise whereby profit comes from the efforts of a third party. Some common marketable (exchange traded) public securities that Non-Accredited investors can invest in are REIT’s and REIT Mutual Funds. Alternately, Direct Participation Programs and Private Placements are less liquid securities that may only be suitable for Accredited investors - defined as typically having at least $1M of investable assets (excluding primary residence), and / or $200K of annual income (single filer) or $300K of annual income (joint filer).
Non Securitiesare any direct investments made by an individual into real estate whereby they own the deed directly, or in partnership with a group of individuals or entities to which the individual or group has full managerial control. In this instance, Real Estate is any real property consisting of land or buildings.
Determining your investor type is a critical key to choosing the type of real estate investment you should consider.
- Do It Yourself (DIY)
- Investor looking to gain hands on experience
- Someone willing to take ownership of most, if not all, of the risks in the process
- A person that can afford the financial losses that “gaining experience” may cost them
- Loves to research
- Has time to invest in the process
- Is good at planning and executing
- Do It With Me (DIWM)
- Someone that values advice and direction
- Would like to mitigate risk
- Appreciates education and is a social learner
- Would prefer to leverage advisors and Strategic partners to do research
- Has limited time to invest in the process of execution and planning
- Do It For Me (DIFM)
- Busy Professional looking for an easy investment solution
- Would like to transfer risk
- Appreciates experience and is confident in their ability to find knowledgeable people to support them
- Would prefer to get the synopsis of the offering(s) and a quick comparison of the options
- Has very little time to invest in the process
- Would prefer to be more involved in the planning and strategy part, and less in the research and execution part
Identifying your investor type may lead to better selection of the real estate investments (and corresponding risk metrics) that fit you. In my experience, the better the fit, the more likely you are to have financial success…just remember that all investing has a risk of loss and it’s the investor’s responsibility to understand them before making an investment.
For example, a non-accredited DIFM investor type may be a good fit for REIT mutual funds or DPP’s since those investment types eliminate the need for dealing with the “3 T’s” of real estate investing, namely the Tenants, the Trash and the Toilets. Smart DIFM investors invest more time understanding the management strategy & fees, investment asset class, and investment structure before investing, then give the fund time to realize its intended outcomes with minimal ongoing time commitment necessary.
Alternately, an accredited DIWM investor with some sound experience may wish to invest in a private placement. This investment path may require the hiring of a securities attorney to review the Private Placement Memorandum (PPM) and other financial professionals to perform due diligence on the project. This type of investing often has higher risks and higher potential returns than the more widely used marketable securities above.
From my experience, the DIFM investor should expect the lowest Risk premium, since they put in the least amount of effort (vis-a-vis their time commitment and investment concentration risk – especially when using diversified funds). DIWM investors often find themselves in the middle of the return stack, since they exchange more personal time and other additional resources and often take on more complex and various kinds of risk than their DIY counterparts.
Of course, the DIY’s have the most to gain and also the most to lose, given they typically commit the highest amount of resources and time to very concentrated positions they often own and operate themselves. For example, they may have to hire and manage a general contractor to build a spec-home or manage their rental homes. This time commitment represents an opportunity cost of both earnings and other investments that DIY’s must be very clear on before wading into the waters too deeply.
Ultimately, making successful investments in real estate requires that investors are clear and honest about their investor type; have a reasonable understanding of the value of their time; and know the risks before committing their hard-earned dollars to any real estate project. Armed with this information, hopefully you better understand where you fit when it comes to investing in real estate.