By Ketan Patel
Date August 1, 2018

How to Capitalize on Real Estate Deals without Investing a Lot of Time

Real estate commonly tops passive investment lists, which can be both misleading and deceiving. Not all real estate deals create a passive income, and not all property offers low-risk gains.

Passive investing conjures up imagines of a “set it and forget it” investment strategy. You choose an investment vehicle and let it ride. In return, you receive consistent gains with no more work than a crockpot meal. The challenge is that many real estate income opportunities require a bigger time commitment than expected. In every case, you must educate yourself on the opportunity along with the potential upside and anticipated risks. From there the time commitment varies depending on your investment strategy and real estate choices.

To understand how to identify true passive investments that will lead to consistent gains, you must first understand the five basic formats for real estate investments and what each requires for success.

We have listed the following real estate opportunities from the highest to the lowest in terms of time commitment.

1. Fix and Flip

Fix, and Flip deals make great shows on HGTV. The investor finds a home, repairs it, and makes $100,000 profit in 30 minutes or less. The reality is, the fix and flip investment strategy are the most labor-intensive of all real estate investments. Before the purchase, you must have partners in place that will finance the deal, complete the repairs, and resell the property quickly. You must do the legwork to identify a low-cost home in a profitable neighborhood, that can still turn a profit after considering all costs.

A successful flip can turn a profit into 90 to 120 days. However, there is an active time commitment involved in every step of the process. Investors also incur a higher risk of loss because a turn in market conditions, unexpected repair costs, or a slower sales cycle can lead to a loss rather than a profit.

2. Buy and Hold Short Term Rentals

Buy and hold short-term rentals also appeal to the sexy side of investing. You buy a vacation home in your favorite destination. Use it for the annual family holiday while relying on the rental income to cover all the costs. A free vacation home paid for by weekly rental income.

The reality is that short-term rentals also come with high time commitment, high costs, and high risk. Weekly rentals require ongoing management in the form of vetting potential renters, collecting rent and deposits, cleaning the property between guests, and deposit returns. Weekly rentals also experience higher maintenance and repair costs due to breakage, replacement costs due to theft, utility bills, and continual upgrades to attract vacation renters each year.

Due to the time-intensive nature of vacation rentals, most investors hire a management company, which can take upwards of 40% of the rental income, significantly lowering the profit potential of the investment. You may or may not have enough cash flow to cover all the ongoing costs of operating the property.

3. Buy and Hold Long Term Rentals

Buy and hold long-term rentals typically require a lease of one year, lowering overall costs. The renter typically pays the utility costs and yard maintenance, while you receive a steady income and reliable cash flow. Proper tenant vetting could lead to tenants remaining in place for several years, which reduces the overall cost of managing and maintaining the home.

Investors must also act as a landlord. You must identify appropriate tenants, collect rent, and complete ongoing maintenance. Hiring a property manager to complete these tasks will cost between 7 and 10% of the rental income. Property managers also charge the owner for repair and maintenance costs, as well as a fee for finding a new tenant.

Risks include long-term vacancies and market conditions that can impact both rental rates and appreciation.

4. Lending Opportunities such as Peer-to-Peer Lending

Peer-to-peer lending platforms have allowed the average investor to become a lender. Websites such as Prosper and Lending Club initially had a business model that offered borrowers lower rates than traditional banks with less stringent underwriting policies. They also promised lenders (investors) higher than average rates of return, at a time when bank savings rates were dismally low.

Both lenders and borrowers bought into the business model. Yet, after several years of higher than expected losses, investors began to demand changes. In response, peer-to-peer lenders began to increase rates on borrowers and implement stricter underwriting policies, which now largely resemble traditional banking structures.
From a time commitment standpoint, investors choose the borrowers they want to support. From there, the investment is mostly passive because the lending platform does the legwork, which includes collecting payments and distributing money to investors.

5. Syndicated Deals

Syndicated deals offer some of the most passive investment opportunities with the highest rates of return.
A syndicated deal is essentially a large property purchase by a small group of qualified investors. The large loan amount is greater than a single investor can take on in terms of capital and risk. Real estate deals also require a higher level of real estate deals expertise and rely on an agent to perform most of the work.

The agent takes care of the administration of the real estate deals, which can include identifying the property, managing cash flows, paying out dividends to investors, and executing the exit strategy. Because investors rely on the agent to locate, manage and sell the property, the investor receives truly passive returns.

The project approval is the extent of the investor’s time commitment. The corporation and agent complete all remaining work to ensure the project runs smoothly. Multiple investors spread the risk, create more buying power, and improve the leverage on the property, without sacrificing gains.

Capitalizing on Passive Investment Deals

Real estate can provide a passive investment, requiring a small up-front time commitment for the investor, while providing healthy gains. Understanding which real estate investment opportunities meet your level of expertise, time availability, and investment objectives will help you maximize gains while meeting your long-term expectations.

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