Month: February 2020

Passive investing, generally, is a type of investment where you can generate income from your investments without significant active participation. Index investing is one of the more common forms of passive investing that allows investors to purchase an index fund comprised of stocks that closely track the underlying index without the need for active trading by the investor. In the equity markets, index funds are now widely accepted to provide equal or better returns than an actively managed portfolio, and at a lower cost to the investor.

For those looking to diversify their portfolios to include real estate without doing a lot of the heavy lifting, there are several passive investment options. Some of the more common passive real estate investment strategies that are available include crowdfunding, REITs, remote ownership, and trust deed investing, all of which have the potential to generate high returns if you make smart investments. If you want to invest in real estate but don’t want to take on too much risk with your investment portfolio, passive real estate investment may be ideal for you. Below is a general primer on these four passive investment strategies.

Crowdfunding

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One method of passive real estate investing that has become increasingly popular in recent years is crowdfunding. Crowdfunding occurs when numerous smaller investors pool their resources to make a single investment. In real estate, crowdfunding is often used to provide debt or equity to real estate professional operators to invest in varying types of real estate including commercial properties, single-family homes, and apartment complex portfolios. These types of investments typically require investment minimums that can range from $500-$100,000, depending on the investment. Over the years, online crowdfunding platforms have specific to real estate have increased in popularity and sophistication.

There are a variety of questions that you should ask yourself before you get involved with investing through crowdfunding. As just one example, some platforms require that anyone wishing to join the platform be an accredited investor, which usually means that you need to have a high net worth or annual income. If you aren’t accredited, you may need to consider an alternative passive real estate investment option. You should also consider the reputation and legitimacy of the crowdfunding platform you select. They come in all different shapes and sizes, especially with their recent proliferation.

Regarding the investment itself, you will want to make sure you understand and carefully evaluate the investment and its terms. Crowdfunding platforms are typically just a “platform” or “marketplace” where third parties can post investments. Other than satisfying general criteria, the quality of the each investment has likely not been evaluated by the crowdfunding platform. Factors that you will want to evaluate include, among others, the quality and experience of the sponsor, the value of the underlying property or properties securing the investment, the terms of that investment, and whether you would rather invest in equity or debt. As to the latter consideration, certain crowdfunding platforms offer both investment options.

Online Platforms for Real Estate Crowdfunding for Passive Investments

While there are many online platforms that you can use for real estate crowdfunding investments, three of the more popular platforms include:

While AB Capital does not endorse any of them, each of these three platforms are considered to be among the more widely used for crowdfunding real estate investments. Before you make a decision on which platform you would like to invest with, it’s highly recommended that you take a brief look at all of them to compare the features that they provide and the types of investments that they offer.

REITs (Real Estate Investment Trusts)

Stock Market on computer and iphone

A REIT is a real estate investment trust wherein a company owns, finances, or operates real estate that is typically income-producing. It is similar to a mutual fund, except that instead of investing in stocks, the REIT invests in real estate. Certain REITs will directly buy a portfolio of properties that they believe will generate an appropriate return, while other REITs will invest in real estate debt, mortgage-backed securities, and mortgages. To best understand which REIT strategy is right for you, it’s important that you know more about the process of investing in a REIT. Like mutual funds that invest solely in real estate, REITs provide passive investors with stakes in substantial real estate deals without the usual high barrier of entry. A REIT also is required to distribute at least 90% of its taxable income to shareholders each year in the form of dividends, so it may provide an attractive option for income-seeking investors.

When comparing crowdfunding with a REIT, the main difference between the two is that REIT portfolios typically include investments in many different properties and even types of properties, whereas crowdfunding investments are typically property or project-specific. In that sense, REIT investments are typically more diversified. By investing in a broad range of properties at once, the failure of one property shouldn’t significantly damage your overall investment strategy. Spreading around the risk is a great strategy if you want to take a measured approach to investing.

There are three primary types of REITs that you can invest in, which include exchange-traded options, non-traded REITs, and private REITs. If you invest wisely, it’s possible to receive multiple income streams through annual dividend income as well as long-term appreciation. REITs also provide you with a good opportunity to diversify your portfolio. Many successful real estate investors find that REITs are a wise investment option when used alongside mutual funds and stocks.

There are also a couple of issues that come with investing in an REIT. For instance, these trusts are tied directly to stock exchanges, which means that your REIT can lose some of its value if the stock exchange that it’s tied to does poorly. You also don’t have control over your investments. However, this may be ideal for you if you would rather participate in passive real estate investing.

How to Invest in REITs

If you want to invest in REITs, it’s possible to directly buy shares in the REIT that you’re interested in. This can be done just like any other type of public stock listed on a major stock exchange. You can also use a broker, financial planner, or some type of other professional advisor who can help you analyze the REITs against your financial objectives, and who may also have access to other private REITs that are not available on a publicly-traded exchange.

Remote Real Estate Ownership

home for sale with sign in front yard

Remote ownership is another form of passive (though less passive) real estate investing that allows you to obtain complete ownership of remote property. This passive investment strategy is a favorite of many seasoned real estate investors because it allows complete ownership without requiring too a active role in managing the property. If you’re looking to invest in a remote property, you can do so by using an online platform to find, research, and purchase out-of-state rental properties that already have tenants in place as well as property management. The managers that are already tied to the property will manage the property for you while you collect rent each month.

In many cases, it’s possible to purchase remote real estate without ever visiting the property in question. The main benefit of using this specific strategy of passive investing is that if done properly you can obtain higher returns than other forms of passive real estate investing. Because you have complete ownership of a specific property, all of the appreciation for the building as well as the monthly rent payments will go directly to you. There may also be additional tax benefits available. The data that you need to analyze to make a wise investment decision is also typically readily accessible online. Indeed, many online platforms offer extensive data and information on the various homes and rental properties that you can invest in, which allows you to perform your research in a short period of time.

If you don’t have enough funds to purchase real estate nearby, this form of passive real estate investing gives you the opportunity to diversify your ownership of properties across numerous locations, which lessens the risk that a poorly performing market will substantially hurt your investment portfolio.

Like all investments, however, there are also some risks that you should consider. For one, you’ll be purchasing a home in a different location and potentially without having visited it in person. To mitigate this risk, you should do extensive research on the property you’re interested in before you invest and/or align yourself with a trusted person in the market. It can also be difficult to assess tenant reliability when you don’t have easy access to the property in question. If a tenant moves out unexpectedly or makes a late payment, following up with them may prove to be difficult. On the other hand, the managers at the property should be able to take care of these issues without much trouble on your end. In addition, property ownership comes with additional liability and costs such as insurance, vacancy, and repair costs.

Online Platforms to Buy Remote Real Estate

If you would like to invest in remote real estate, there are several highly popular online platforms that you can use to purchase remote properties, which include:

Keep in mind that each of these platforms is focused on a different location. Roofstock allows you to invest in single-family rental properties that are situated all throughout the U.S. While Lyvly gives you the ability to purchase rental properties in London. When you purchase one of these properties, weekly cleaners and an in-house maintenance team will take care of the property for you. When it comes to Property Finder, you can purchase apartment buildings, townhouses, villas, and penthouses in Dubai. AB Capital does not endorse any of these platforms.

Trust Deed Investments

Trust Deed investing provides yet another option to passively invest in real estate. With a trust deed investment, you are investing in a loan secured by a deed of trust recorded against a specific property. You will typically receive a stated interest rate of return that is paid monthly, and the return of your principal investment at maturity. In this sense, you are acting as the lender, as a bank would to someone purchasing a property.

*Disclaimer: The statements and opinions expressed in this article are solely those of AB Capital. AB Capital makes no representations, warranties or guaranties as to the accuracy or completeness of any information contained in this article. AB Capital is licensed by the Financial Division of the California Department of Business Oversight as a California finance lender and broker (DBO Lic. No. 60DBO-69427). AB Capital makes money from providing bridge loans. Nothing stated in this article should be interpreted, construed or used as legal, financial, investment or tax planning advice, or a substitute for thorough due diligence and the exercise of sound independent judgment. If you are considering obtaining a bridge loan, it is recommended that you consult with persons that you trust including but not limited to real estate brokers, attorneys, accountants or financial advisors.

A trust deed is a type of agreement securing a real estate loan that’s made between a lender and borrower to have the main property held in a trust by an independent and neutral third party until the loan is paid off. The third party, know as the trustee, that the property may be transferred to is typically an escrow company, title company, bank or loan servicer. Even though trust deeds aren’t as common as they once were, they can still be used in 20 states, one of which is California.

Investing in trust deeds means that you will be investing in loans that are secured by real estate. The majority of these investments are short-term loans, typically 5 years or less, which means that it won’t take long for you to determine if the investment was a smart decision. Trust deed investing fills a void in the real estate lending market because banks typically only provide long-term mortgages, as opposed to short-term bridge loans. As a trust deed investor, you effectively replace the bank in this void by making short term real estate secured loans.

This void has grown because banks have become less and less interested in providing short-term trust deed loans following the 2008 financial crisis, primarily due to the large volume of non-performing or bad loans on their balance sheets. If you’re interested in learning more about trust deed investing and the kind of opportunities it provides, the following offers a helpful guide.

The Differences Between Trust Deeds and Mortgages

person standing on arrows pointing in different directions

To understand trust deed investing, you should first know the difference between trust deeds and mortgages. There are two primary differences between a trust deed and a mortgage. The first difference is that a trust deed is comprised of three separate parties, which include the lender, the borrower, and a trustee. The trustee holds the property in trust for the benefit of the lender. In the event that the lender is paid on time and as promised, they will no longer have any claim to the property. Whereas, a mortgage is between two parties — the borrower and the lender.

The second primary difference between a trust deed and a mortgage is what happens if the borrower defaults on the loan. If a borrower defaults on a mortgage loan, the lender has to pursue the foreclosure process through the courts to try to secure the title to the property to satisfy the borrower’s debt. In contrast, if a borrower defaults on a trust deed loan, the trustee can pursue a non-judicial foreclosure process that is typically quicker and less costly, as discussed further below. With a deed of trust, the trustee who holds onto the property title will be in charge of pursuing the final foreclosure process if the loan goes into default.

One of the main reasons that banks choose to invest in mortgages as opposed to trust deeds is that mortgages are typically long-term, investments that are paid out over 15-30 years at a low, but stable, interest rate. On the other hand, trust deed investments are typically short-term investments that typically mature in 5 years or less, but pay a higher interest rate.

Advantages of Trust Deed Investing

man in blue suit with thumb up

There are many advantages to trust deed investing that makes it an attractive investment vehicle for sophisticated high-net-worth individuals seeking to diversify their portfolios. One key advantage is that your investment is typically made at a significant discount to the actual value of the property. For example, typical trust deed loans in California are made at 70% or less of the property value. In other words, if a borrower is purchasing a property valued at $1,000,000, a trust deed loan secured by that property will typically be in the amount of $700,000 or less. That fact provides a safety cushion to account for market corrections or other expenses that may be incurred in the event of a default.

Another key advantage to trust deed investing is that your investment is secured by tangible property that you can take title to in the event the borrower defaults on its loan obligations. This is unlike a stock investment where you don’t have recourse to the assets of the company if your stock doesn’t perform well. As set forth above, and different from a mortgage, in the event the borrower doesn’t make its payments, the trustee there are certain laws in place that make it easier for the trustee to sell the property to satisfy the debt.

The lender will have the ability to begin a quick and less expensive foreclosure that’s non-judicial in nature. A non-judicial foreclosure provides the lender with the ability to bypass the court system and instead use the terms of the trust deed as well as State law. Since the courts aren’t involved, the process can typically be completed in a more timely and cost efficient manner compared to a judicial foreclosure through the courts.

In California, the non-judicial foreclosure process begins when the lender records and provides the borrower with a Notice of Default, which gives the borrower no less than 90 days to correct if possible. If the borrower does not cure the default and repay any outstanding amounts, a Notice of Trustee’s Sale will be filed, and no less than 21 days after which the property can be sold at a foreclosure sale. Because this process is typically quicker and easier than any type of judicial redress, it minimizes some of the risks that come with making a trust deed investment.

Because of the protective equity cushion, mentioned above, if the property value is relatively high in comparison to the outstanding loan amount, the investment shouldn’t lose any money if the borrower ends up defaulting on the loan. Since the lender can foreclose on the property and sell it, it’s possible to regain the money that was invested, which isn’t possible with many other investment types.

Yet another advantage of trust deed investing is that it typically provides an appealing yield with low risk relative to the returns. Because trust deed investments are generally shorter in duration and extended to borrowers who may not satisfy bank lending criteria, you should be able to earn annual returns in the high single digits to low double digits, depending on the characteristics of the loan and the assessed risk. These returns are typically paid to you at a monthly fixed rate with the principal investment amount paid in full when the loan matures. This type of investment is a great way to obtain passive income since you won’t be required to actively manage your investment. Instead, if the loan performs as expected, you can relax while bringing in income from the payments that are made by the borrower each month.

Disadvantages of Trust Deed Investing

Two women sitting at table with documents

While trust deed investing can provide you with attractive risk-adjusted returns, there are some disadvantages that you should know about before you invest your money into a trust deed. For one, these investments aren’t liquid, which means, unlike a stock, you can’t decide to take your money back when the investment starts to show warning signs. Instead, you have to plan to commit to the investment for the full term of the trust deed investment because you typically won’t be paid off until the loan fully matures.

There’s also no capital appreciation or equity, which means that the asset won’t increase in value during the term of the loan. You will be paid a stated interest rate only. While the investment can provide you with a relatively high return relative to the risk, there won’t be any unexpected increases or significant upside in the return that you receive.

If you want to invest directly into a trust deed, you will also be required to evaluate borrowers, negotiate and assess the terms that you’re providing to the borrower, perform due diligence on the property and the borrower, and navigate the many laws and regulations that govern real estate lending. If you don’t have experience doing this, it can be a risky and time-consuming process and increase the likelihood that you agree to a bad deal or make a poor investment decision.

In addition, all documentation, which can be lengthy and complicated, must be properly perfected. Small errors in the documentation or problems with your due diligence could cause the borrower or another interested party to claim that your documentation is incorrect or that they have interest in the property that is just as valid as yours. Consequently, the borrower may ultimately be able to challenge the terms or the validity of the loan, and potentially take you to court at significant cost and expense. No matter what the claim is, not doing your due diligence or fully and properly documenting the loan exposes you to the possibility that a very safe investment is suddenly a risky one that could cause you to lose your money.

*Disclaimer: The statements and opinions expressed in this article are solely those of AB Capital. AB Capital makes no representations, warranties or guaranties as to the accuracy or completeness of any information contained in this article. AB Capital is licensed by the Financial Division of the California Department of Business Oversight as a California finance lender and broker (DBO Lic. No. 60DBO-69427). AB Capital makes money from providing bridge loans. Nothing stated in this article should be interpreted, construed or used as legal, financial, investment or tax planning advice, or a substitute for thorough due diligence and the exercise of sound independent judgment. If you are considering obtaining a bridge loan, it is recommended that you consult with persons that you trust including but not limited to real estate brokers, attorneys, accountants or financial advisors.