6 Ways to Invest in Real Estate
John Larson and the Real Estate Cowboys talk passive income real estate investing.
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Keith Weinhold: Hey, this is Keith Weinhold from the Get Rich Education podcast. You are listening to my friend John Larson and the Real Estate Cowboys. Don’t quit your daydream.
Robert Helms: Hey everybody is Robert Helms, host of the real estate guys radio show, and you are listening to the Real Estate Cowboys.
Announcer: Have you thought about becoming financially free through real estate investing, but don’t have the time or knowledge to get started? Welcome to the Real Estate Cowboys podcast. Each week we discuss passive income investment opportunities in the red hot Texas market, John Ryerson and the Real Estate Cowboys will show you how to leverage their team to build wealth in real estate through passive investment opportunities. And now here’s John.
John Larson: Hello, and welcome back to another edition of the Real Estate Cowboys. This week we are going to be discussing six ways to invest in real estate. So there are multiple ways that you can invest in real estate, but I’m going to pretty much touch on the six most popular, and ones that we practice here at American Real Estate Investments and the Real Estate Cowboys. And one of the best things that I would say about real estate is the fact that you can invest in many different ways. This makes it really attractive for making money, for all budgets and all financial goals. Okay. As an investor, you can do one or a combination of all the ways to invest in real estate. You don’t really just have to focus on one. There are many, many ways to pretty much diversify your funds into a different investment opportunities.
And I really don’t like to talk bad about any sort of investment opportunity out there, because there’s multiple ways to make money when you invest, even in the stock market. I’m more of a proponent of taking your money out of Wall Street and bringing it Main Street and investing in things like real estate or precious metals, gold, whatever it may be. Just alternative investments in general, but I’m not saying take all your money out of Wall Street. I just think that it’s a good idea to kind of diversify over many different investment opportunities.
And so the first one I would like to discuss is turnkey rentals, which many of you if you follow us, American Real Estate Investments was built on the turnkey rental model. Well, we’ve just found in today’s market that turnkey rentals are not really necessarily what my investors are looking for because most of my investors that come to me are really looking for a consistent stream of cash flow in a very, very passive manner. Whereas turnkey rentals are not the most passive option out there even though you hire a property management company to look out for the asset for you, and even though a company like ours will find the property and do the renovation and so on and so forth, it just really doesn’t turn into the most passive experience in my opinion.
Because you are going to have vacancy, you are going to have maintenance issues, you are going to have just unforeseen things that pop up with turnkey rentals. For example, I mean, we just had a tornado rip through Dallas and destroyed quite a number of houses. Your rental could have been in the path of that tornado. Now you do have insurance that covers that, but you’re going to have some vacancy, right? You’re going to have to move that tenant out, you’re going to have to go through the insurance claim, get the house renovated again, whatever it may be.
And it could be a very lengthy process, right? I wouldn’t say that turnkey rentals are the most passive, but it’s definitely a great way to invest in real estate. It’s just the cap rates based on rental income aren’t what they used to be coming out of the last recession. You’re seeing property prices back up to where they were before the last recession, and that’s really squeezing the cap rate. Interest rates are still great though. And the great thing about turnkey rentals is you can buy a $150,000 property in a good neighborhood with only $30,000 down, right? So with that, with the financing that’s available to you at Fannie Mae, I mean, it just makes it such a great investment opportunity. But turnkey rentals, I will say, are probably one of the easiest ways to invest in real estate. You understand it. We live in homes ourselves, so we kind of understand how a house works, right?
I’m sure we paid rent at some point in our lives, so we understand how it is to deal with a property manager or a landlord. So they’re very easy to get into because we, as just people in general, are very familiar with that type of model. It’s pretty simple, right? You move into a house, you pay rents, that rent goes to the landlord, you pay a property manager to look after things, but you know once the tenant moves out there’s going to be some turnover and there’s going to be some sprucing up that needs to be done to the property. It’s just generally easy to understand, right?
Let’s talk a little bit about what turnkey is though. Because I think that this can be misconstrued sometimes, but turnkey rentals are defined as a rental property that is sold to the investor turnkey in quotations. I’m going to say, turnkey. That is that the property is all set up to start making money for the investor from day one. Now turnkey cannot be misconstrued as is never going to have any problems. Or it should completely pass an inspection report on the first go around. I mean, turnkey means that, hey, the property is in livable condition and it should be freshly renovated and it’s ready for a tenant to move in and start paying money. It’s safe, it looks good, but to have the opinion that it’s not going to have any problems because it’s turnkey, that’s just not realistic, right? Houses are always going to have problems.
I will say the best turnkey rentals are definitely a nicely rehabbed property, a freshly rehabbed property. A new owner shouldn’t have to start making repairs to the property right away. Now there are little things that can pop up, maybe like a minor plumbing issue, something with a garbage disposal. I mean, we’ve seen a lot of different things that are just minor ticky-tack stuff, but you should really have no major repairs going into a turnkey rental. There’s usually a tenant in place paying rent, and often a property manager already in place as well to ensure that the property is being managed professionally and rent is being collected on time and distributed to the owner.
Optimally, the investor wants a cash flowing turnkey rental, which means that there’s profit even after all the monthly expenses have been paid. And that even includes the mortgage, right? And any property management fees associated with running that property. But that’s what you need to look for ideally, right now in today’s market. You’re not really going to find super high cap rates, unless you’re buying properties in in-distress neighborhoods, areas where there’s a lot of crime, there’s a lot of theft.
There’s areas where we’re not going to attract the best tenants, which it’s just not going to make it a very turnkey, I guess, passive experience for you when you’re chasing cap rates and markets and neighborhoods like that where you’re seeing like your low C to D properties. They’re just far too risky.
Number two, moving on from turnkey rentals would be fractional ownership, vacation rentals. Now you could go buy a vacation rental, at Myrtle Beach, in Florida and wherever it may be Northern Michigan. You can buy it outright. Or, there’s opportunities to buy properties on a fractional model because we get busy, and how often are you actually going to use your vacation rental? I guess you could go the Airbnb route, but I’ve heard some horror stories about Airbnb too with these short term tenants that come in and trash the place.
Not to say that Airbnb model isn’t good, it is. You just have to be picky about the people that you let rent the property. For example, I have a great rating on Airbnb when I stay at other people’s places. I’m very respectful. So, with that being said, I have a great review. I get great reviews as somebody that looks to rent AirBnBs and short term rentals. So if I’m an owner of an Airbnb, I’m probably only going to want to accept people that have good ratings and have rented AirBnBs before. I’d be very picky about who I let in my property because I have heard, the stories about parties and damage to the property and even theft. I stayed in an Airbnb recently where the televisions, the previous tenant that was in there stole all the televisions out of the house.
So that doesn’t set that up for the most passive experience either. But with vacation rentals, you know you’re not going to use them all throughout the year. You have a family, you have a job, you have other things going on. Even when you’re retired, you’re not necessarily going to vacation all the time. So I like the fractional model because it’s not a timeshare. You share in on the expenses, you are part-owner of the actual property. You own it with a group of others, maybe four other people. And you each get 10 weeks allocated to you to either rent out that property or to use that property during those weeks. And it makes it a lot more cost-effective, gives you an opportunity to cash flow on it as well. And at the end of the day, if you really think about it, you might only use the property maybe two to four weeks tops throughout the year.
I think that that’s a really, really good model to look after as well. It’s popular because the investor not only gets the monetary benefit of the cash flow, but they can also personally use the vacation property for two to four weeks per year, or whatever it may be. Fractional ownership is also affordable because of the cost of the maintenance is shared by the joint owners of the properties, so you’re not assuming all of the maintenance. And also through the fractional ownership model, an investor who might not be able to afford even a cheap vacation property, might be able to get to a premium level property in a top vacation spot by doing a fractional model, right? By owning the property with a group of others.
Well, the best vacation rental properties are located in areas that are affordable tourist attractions and if you’ve been following us and the Real Estate Guys and Get Rich Education and other popular podcasts out there, Belize is an area where we’ve done a lot of these fractional ownership properties and private islands and things of that nature. So we really Belize because it’s affordable. The dollar’s locked in two to one, and it’s English speaking and it’s a quick jaunt from America to get down there. There’s a lot of direct flights either from Dallas, Houston, Denver, you can make it out there. I believe Phoenix, you can get a direct flight to Belize, and a lot of cities in Florida as well will fly direct to Belize. Miami, I know for sure. So it’s easy to get down to Belize as well, which is attractive.
The third one moving on from fractional ownership would be private money lending, which is our most popular investment option out there because it pays out fixed returns in the form of double digits. We have a deal right now that’s paying out 15% annually. $100,000 investment’s going to pay you $15,000 a year and it’s backed by real estate. It’s backed by a hard asset. We’ve done some raises for CBD extraction equipment, which I’m going up to Denver tomorrow to go check on those machines. They’re about to come online and we’re about to start processing hemp, we’re about to start harvesting our first crop of hemp that we grew up in Montana, so excited about that.
And there’s a huge, huge demand for crude oil right now, which our machines are very, very efficient in producing crude oil. It’s an inline extraction method where the oil also gets winterized and de-carbed as it extracts, so very, very efficient. So we’ll be selling winterize, de-carbed crude oil to refineries located in the Colorado area, and there’s plenty of refineries there that will then take the crude oil to either a isolate or a distillate. The CBD market is still just booming. Tons of demand, tons of new product lines coming out, big, big companies getting involved, Coca-Cola, other companies that are getting involved with CBD and are looking to start unveiling CBD product lines themselves.
So, the demand for those refined goods, whether isolate or distillate, whatever they’re adding to their product line is growing by the day. So very excited about that.
Private money lending, it’s a great way to enjoy very high returns with very little risk. Basically your money, your loan is collateralized by an asset, right? So whether it’s through a deed of trust with real estate, or a UCC one with personal property, that’s how we collateralize your money. And like I said, you will then receive a fixed dividend each month. You know what you’re going to make each month to the penny.
So there’s vacation rentals and turnkey rentals, you obviously run the risk of vacancy, you run the risk of maintenance and things of that nature, which that could change your payout each month. Maybe sometimes you’re even paying into the property with rentals. Whereas with private lending, you’re making money every month and if you have a tax free vehicle, like a self-directed IRA or 401k, those dividends are going back to you tax free or tax-deferred, depending on what type of retirement account it is, self-directed account.
The downside though, with private money lending, is typically it’s only available to accredited investors. And so for those who are accredited, private money lending is definitely popular, right? It’s a great, great option. It’s one of the most passive ways to invest in real estate that exists for sure. And with private money lending, an investor makes funds available for a project. The borrower might be commercial or residential or a residential developer, or it could even be an individual. And the investor receives a certain amount of dividends each month and gets their capital returned in a relatively short term, often 12 to 18 months. That’s typically what our terms are here. Private money loans, they do typically have steep minimums, which is another reason why they’re generally only accessible for select investors. So like the example I gave earlier, you could buy $150,000 property for $30,000, almost every private lending opportunity that we have, the minimum investment is 50.
So you’re coming out of pocket for a little bit more. But like I said, you’re receiving double-digit returns on that investment. Another downside with private money lending though, is there’s really no tax benefits to it. So you are going to have to pay some taxes on those interest payments that you receive each year unless it’s going through a, like I said, self-directed IRA or 401k.
Moving on, number four would be a REIT, a Real Estate Investment Trust. These trusts are typically held by corporations and invest in real estate properties. So basically these are large corporations that are buying up multiple real estate properties, whether multi-family, whether commercial, whether a mixture of both, retail, whatever it is. Cash flowing properties that are then, the income that is generated by those properties is then evenly distributed over its shareholders, okay?
And so when you invest in a real estate through a REIT, you’re basically buying a real estate stock, okay? And many REITs are also publicly traded. And so the investor then gets a return of interest on their investment for as long as they are invested in the REIT. And the percentage of the return on REITs varies depending on the stock, and where the investor puts their money. And it’s a very simple way to invest in real estate with very little money, the investor doesn’t need to be accredited and they can liquidate their investment at any time. There are no set terms. So that’s pretty good, right? You can buy out at any time, sell out at any time.
Number five would be public or private real estate investment groups. So anyone can start a real estate investment group. If an investor has friends or family members interested in investing in real estate, they can make the union official by forming a legal entity.
On this scenario, someone in the group would be in charge of finding real estate deals to invest in. The group then shares in on the expenses and the profits from the investment. This is a great kind of equity model, okay? And the terms of the private real estate investment group are flexible. They can be anything that the group decides upon. And a public real estate investment group operates in a similar fashion, except that anyone is welcome to pool their money with others and the person making the real estate investment decisions is most like a board or a group of select members, okay?
Obviously, with a private group, those are popular, like I said, you pool together friends and family. Everyone has some money to put in on a real estate investment project, so maybe you take down a commercial building that’s cash flowing, you would all share in on the expenses and the revenue generated by that building, and maybe come in and buy that building cash and then refinance it, unlock some funds and then go do it again. Rinse and repeat. It’s a great model to kind of get involved in real estate and take down larger projects by just pooling together people that you know and trust.
And then the final one, which I’m not the biggest fan of because I’ve done so many of them and I’ve seen all the ways that things can go wrong, and it’s just more active and this is more of a passive investment show, but house flipping. It’s really I guess easy to get into because it’s easy to get loans right now. It’s tough to find good deals on properties, I will say that. And it’s really tough to manage the renovation of the property, especially if you fully don’t understand what goes into renovating a home and you’re trusting a general contractor to do the work for you.
I’ve just seen a lot of general contractors rip people off, charge a lot more for work than what it really costs. They take a longer time to get it done. They cut corners and they’ll take advantage of investors who don’t know what they’re doing. The problem is, there’s all these TV shows and it makes it look like it’s so easy to flip a house, but in actuality, it’s really not, it’s very, very difficult. And it’s very time-consuming. It’s not passive at all. And honestly, the returns just aren’t there like they used to be. Coming out of the recession, you can make 40% on flipping a house. Today, you’re lucky to make maybe 15%, 20% on your flip. It’s not as easy as it was, the deals are skinnier. It’s not, it’s not the best time. I will say that, okay? And I’m starting to see property prices in a lot of markets start to plateau.
So you’re not seeing that huge appreciation like we used to. Things are definitely, I believe, cooling down in a lot of markets across America. There’s some that are still really hot, but I’m starting to see some valleys plateau just because the everyday person can’t afford to purchase some of these homes in these middle-class neighborhoods. And that’s where you start to see some correction in the market. House flipping is basically just when an investor finds a distressed property or an undervalued property, rehabs it and then sells it for profit, right? This way of investing is very labor-intensive like I said, even if the investor isn’t doing the manual work themselves, they need to oversee the project in order to protect themselves and their investment. And house flipping does carry a larger amount of risk, especially for an investor who isn’t savvy about construction and rehab work. Like I already explained.
Here at American Real Estate Investments and the Real Estate Cowboys, we offer a lot of ways to get started in real estate investing. Private money lending is one of our most popular options right now. We still have fractional ownership properties available in Belize. So if any of these things sound interesting to you, just go to our websites AREIUSA.com, RealEstateCowboysDFW.com, put in your information and a member of our team will reach out and go over the available options that we have right now. We have a few different private lending opportunities. These private lending opportunities pay anywhere from 10 and a half to 15% we have a 15% opportunity right now that’s filling up fast. So if you’d like to learn more about these opportunities before they fill up, like I said, just go to our websites, AREIUSA.com, RealEstateCowboysDFW.com.
That’s all we have for this week. It’s your host John Larson signing off. Be back again next week for some great real estate investment talk. Have a great week everybody, and always remember what is your return on life. This is John signing off.
Announcer: All opinions expressed by the host of the show or the opinions of American Real Estate Investments, LLC, and do not reflect the opinions of guests or sponsors. No personal or professional advice heard on this program should be considered an endorsement to follow a real estate financing or investment strategy. Before acting on any information, seek advice from your financial, tax, mortgage or real estate advisor as the information is not guaranteed, and investment strategies have the potential for profit or loss.