So You Want to Invest In Real Estate

By Fredric A. Press



            With the (hopefully) resurgent real estate market, many of us are asking whether now is the time to diversify our investment portfolios and invest in real estate.  And if you conclude “Yes,” then how should you do it?

            You could buy a fixer-upper house in your area and rent it or flip it, you could buy an interest in a real estate LLC or you could invest in an exchange-traded Real Estate Investment Trust (a “REIT”).

            This is not an investment blog and far be it from me to make a recommendation.  But I will point out some salient facts.

            First, the fixer-upper approach requires that, unless you’ve done it before, you’re not in over your head and that you have a realistic renovation budget.  Unless you have sufficient capital to do it without financing, you’ll also have to obtain a loan and invest capital of your own to make up the equity component your lender is sure to require.  You’ll probably also have to negotiate a contract with a general contractor or, if you plan to be your own general contractor, multiple contracts with subcontractors like carpenters, electricians and plumbers.  And even with the best general contractor, you’ll have to invest time supervising the renovation.  And when it’s done, you’ll have to hire a leasing or sales agent and, if you plan to keep the property for rental purposes, you’ll either have to manage the property yourself (which means the potential for 3 a.m. calls when the roof starts to leak or a pipe bursts) or hire a management company.  And although you likely will buy the property through an entity that provides limited exposure to personal liability, you will most certainly have to personally guaranty any loan.  Personally, been there, done that.  No more, thanks.

            If you go the LLC investment route, you’ll need to do your due diligence to be certain the parties organizing the investment and managing the property (or properties) have sufficient experience.  Of course, you’ll need sufficient capital to make the investment (generally, at least $10,000 - $25,000 at a minimum) and you’ll need patience, because these types of investments generally have long-term exit strategies.  Been there too, and  made and lost money.  If I’m lucky, I’ve broken even over the long-haul.

            And remember that the fixer-upper and LLC investments are illiquid.  If you need your money today, well....

            REITS are entities that own and, generally, operate properties.  And, if they’re exchange traded, they’re as liquid as owning shares in Apple.  You can invest in either individual REITs, REIT mutual funds, REIT exchange traded funds and even global real estate funds.  I like liquidity so, been there and done that too.

One place to get an overview of what a REIT is, what it does and what your investment options are is www.reit.com (which is a website of NAREIT^®, the National Association of Real Estate Investment Trusts^®).

            What’s right for you?  I have no recommendation except to suggest that if you’re a first-timer, ask your tax advisor, your broker or financial planner and do your research.

            Good luck.