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Mezzanine capital is a type of financing that’s comprised of part equity and part debt, which typically allows investors to seek higher than average returns . If you invest in mezzanine capital, you will be able to enjoy the best aspects of senior debt and equity. When looking specifically at the basic capital structure of a building or property, the top of the stack consists of equity holders, which include common equity and preferred equity holders. Below these two levels are mezzanine debt and senior debt.

If you make an investment into a property with senior debt, you take priority over anyone else within the capital stack. When the property performs well, you will be paid before anyone else with the interest payments that are received from the property. If the property doesn’t perform well, senior debt holders can start the foreclosure process or obtain ownership of the property in question. Holders of common equity often take on the most risk since they are paid last, which means that they may not be able to recoup their initial investment if the property fails. However, holders of equity and preferred equity are able to receive higher returns than anyone else in the capital stack. If the property performs well, common equity investors will receive regular payments from the cash flows of the property.

Both mezzanine debt and preferred equity are forms of hybrid capital. While mezzanine debt isn’t secured by the property, it is secured by ownership interest. Holders of mezzanine debt do have some limited foreclosure rights as well. When you’re looking to invest your money into different properties, mezzanine debt often allows you to seek higher interest rates than senior debt holders. This form of debt usually comes with a shorter term of 6-24 months. Since you will also hold some of the borrower’s equity interest, you can foreclose on this portion of the property in the event that the borrower defaults. If you want to get started with real estate investing and are interested in taking on some mezzanine debt, the following article offers up a look at the basics of mezzanine capital.

What is Mezzanine Capital?

Mezzanine capital is a type of financing that’s made up of part equity and part debt. While senior debt holders use the property as collateral, the mezzanine capital investment is made against the property cash flow. Once you invest in mezzanine debt for a specific property, your returns will be largely dependent on the cash flow from the property in order to receive repayment for the principal of the loan.

This typically means that you will need to have patience when dealing with the borrower. While you’re taking on more risk than a senior debt holder, your returns will often be higher and can range from 12-18 percent each year. The equity from this investment usually comes in the form of a warrant, which allows you to purchase actual equity in the property at a later date. If the property happens to be highly successful, the equity that you purchase may provide you with high returns.

The best aspects of mezzanine capital include the regular cash returns that you should receive along with the potential for high returns over the length of the loan. Unlike preferred equity or common equity, this type of investment has low volatility and provides you with some protection in the event that the real estate project fails or the borrower files for bankruptcy. Since around 65 percent of the returns from a mezzanine investment are generated from the contractual interest that the borrower pays, the overall risk of the investment is reduced. Even if you don’t receive any return from the equity that you’ve purchased, most of your initial investment can be recouped with mezzanine capital.

Risks of Mezzanine Debt

There are several risks that you should be aware of when you invest in mezzanine debt. It’s important to understand that a mezzanine debt investment is going to be structured as a long-term investment, which means that there’s less liquidity with this investment type. It’s very difficult to liquidate a mezzanine debt loan until it has reached maturity. If the property fails, senior debt holders will have access to any remaining funds and assets before you.

If the borrower defaults on the property, the only protection that you have comes in the form of the guarantees that you initially received from the borrower. In general, this is the ideal investment type if you want to have a mixture of risk and consistent returns. While senior debt investments are safe, they don’t always garner high returns. If you invest in preferred or common equity, you may be taking on more risk than you’re comfortable with.

The primary characteristics of mezzanine capital include:

Investment is made against cash flow
Regular cash payments
Low volatility
Extensive downside protection
High returns
Warrants
Potential collaboration with senior debt holders

How Does Mezzanine Capital Work?

If you want to make an investment with a local restaurant, you will first need to identify how much operating income that they receive. Let’s say this operating income is $300,000 per year and that you receive a purchase offer from the owners for $1.2 million. If you don’t have this amount of money in your bank account, you could turn to a senior lender to contribute around $800,000 of the $1.2 million price tag. This would leave you with $400,000 in equity that you would need to pay. If you made this investment, you could receive more than 18 percent in yearly returns.

However, you can choose to reduce this equity by focusing on mezzanine debt. Of the remaining $400,000, you could find a lender to add more leverage above the senior debt holder. If they pitch in $200,000 of the remaining $400,000, this would leave you with $200,000 of equity. The mezzanine lender usually provides this financing at a rate of 12-18 percent per year. While the equity holder will earn less each year because of the interest that needs to be paid to the mezzanine lender, their initial investment can be halved, which allows for less risk.

If you want to make a mezzanine investment, you need to find a project or property where the equity holder is searching for a mezzanine lender. Since you are charging an interest rate for your loan, the returns that you obtain can be paid in any way you see fit. The rate of returns will be set in the initial contract with the borrower. You can mandate that the interest payments be made monthly, quarterly, or annually.

What is the Difference Between Senior and Mezzanine Debt?

The main difference between mezzanine debt and senior debt is that the latter doesn’t include any amount of equity. Senior debt investments usually come with lower returns but also lower risk. While mezzanine debt is lower on the capital stack than preferred equity and common equity, there’s still a considerable amount of risk attached to this form of investment. The main risk difference is in what these loans are backed by. Unlike preferred equity or common equity, there is a kind of collateral available with mezzanine debt and senior debt. However, this type of collateral is very different.

When you make an investment with senior debt, your investment is backed by the actual property you’re investing in, which means that a default on the property would allow you to acquire the property completely as a means of selling it or foreclosing on it. With mezzanine debt, your initial loan is backed solely by the cash flow of the property. Because of the higher risk of this loan type, you will charge the borrower a higher interest rate. With senior debt, the interest rate is close to eight percent. It’s possible for mezzanine debt holders to obtain interest rates of 12-18 percent. The choice that you make depends entirely on what you’re looking for from an investment.

Characteristics of Senior Debt

The main characteristics of senior debt include:

Prioritized for repayment in the event of bankruptcy
Lower returns
Secured by property
Lowest risk in capital stack
Regular interest payments

Characteristics of Mezzanine Debt

The main characteristics of mezzanine debt include:

Potential for high returns
Backed by property cash flow
Relatively low volatility
High-interest rates
Regular interest payments
Small amount of downside protection
Warrants that allow you to purchase equity in the property

How Do I Invest in Mezzanine Debt

When you want to invest in mezzanine debt, there are two primary methods for doing so. You can either negotiate mezzanine debt transaction with a company or invest in a private fund structure that pools investments together for the sole purpose of investing in mezzanine debt. If you’re an individual investor, you should consider the second option. By joining a private-fund structure with many other investors, your risk may be significantly reduced. You may also be able to join the private fund without needing to make a large initial investment.

Mezzanine debt investments that are made directly with the company or company owners typically require that the investors provide a large amount of capital. These direct investments are commonly made via private equity firms, investment banks, or family owners. If you’re a smaller investor, you will likely need to have a relationship with the borrower if you want to be able to invest in mezzanine debt. Otherwise, this type of direct investment is usually reserved for large institutions.

When you want to engage in this type of investment, keep in mind that the negotiation and closing process can take anywhere from a few weeks to a few months. The easiest way to enter the mezzanine debt market is via a private limited partnership, which is usually organized by an asset management firm. They will gather the funds and handle negotiations for obtaining high returns with comparatively lower risk.

Why Your Company Might Choose Mezzanine Financing

If you or your company is considering investing in mezzanine financing, there are numerous reasons why you might want to do so when compared to the other types of financing in a capital stack. The potential returns are high and may provide you with fantastic dividends. Because of the contractual interest return that you will have made with the borrower, the volatility of this type of investment is typically lower. In most cases, the interest rate that’s negotiated when making a mezzanine debt investment is around 15 percent. You should receive interest payments in cash around once per quarter. If you are looking to take on some risk with your investment portfolio but want some amount of protection with your investment, choosing mezzanine financing as your primary form of investment is a good option for your portfolio.

When you want to get started with a mezzanine debt investment, you should first determine how much capital you’re willing to invest. If you’re investing hundreds of thousands of dollars, you could consider directly negotiating with the owners of the property. In the event that your investment is closer to $5,000-$20,000, it may be better to join a private investment management firm that focuses on mezzanine debt. With this approach, your investment will be pooled with other investments and will be managed directly by the private firm.

*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.

Common stock market investments include stocks, bonds, index funds, and mutual funds. Another common type of real estate investment that you may want to consider adding to your investment portfolio is a real estate hedge fund.

A standard hedge fund is a kind of limited partnership of numerous investors who pool their money together before making investments, which could be something like making an investment with borrowed money. The goal of a hedge fund is to obtain substantial capital gains while hedging against the inherent risk of investing. This portfolio is managed by a professional management firm on behalf of its investors.

When looking specifically at real estate hedge funds, this type of investment has been increasing in popularity over the past decade. While hedge funds can consist of liquid assets that can quickly be converted into cash if need be, hedge fund management firms are accepting more and more real estate as a kind of non-traditional investment. Of the many hedge funds that are in operation throughout the country, nearly 40 percent of them are heavily investing in real estate at the moment.

If you are interested in real estate investment, a real estate hedge fund may be an opportunity for you to diversify your portfolio. If your portfolio is currently comprised of some low-risk, low-return investments, real estate hedge funds are a great way to balance your portfolio. Before you go forward with investing in real estate hedge funds, it’s essential that you know how these hedge funds work, which is detailed in the guide below.

How Do Real Estate Hedge Funds Work?

A real estate hedge fund is a popular type of investing that involves pooling capital from numerous investors before making a single investment in some form of real estate. While hedge funds are very similar to mutual funds, the core difference is that hedge funds generally take on more risk than mutual funds. With any real estate hedge fund making investments in real estate, there are different ways in which a hedge fund manager can choose to make these investments, which depends on the investment strategy that each firm uses.

The most common method of investing via a real estate hedge fund is with a REIT. When you make an investment with a real estate investment trust, the company in charge of the trust essentially owns and operates various types of real estate that can produce income. In many cases, a REIT can be traded on numerous major exchanges. When a hedge fund invests in real estate, it can do so via the publicly-traded stock of existing real estate companies like REITs. When the hedge fund that you’ve invested in decides to invest in a REIT, you can be provided with long-term returns, dividend yields, and portfolio diversification.

Along with investing in REITs, another method of investing in real estate hedge funds is through the acquisition of properties. In most cases, the properties that are acquired by real estate hedge funds are performing poorly in comparison to the wider market, which means that their value could have recently dropped by a significant amount. The benefit of investing in under-performing properties is that these investments can be made at below market rates, which helps to reduce risk. The properties that are invested in by a hedge fund can be centralized in one location or can be purchased from all over the world.

The main difference between a REIT and an investment into an actual property is that a pure real estate hedge fund owns property. On the other hand, a real estate hedge fund that’s centered around a REIT will own stock of real estate companies. Keep in mind that different real estate hedge funds can focus on different things. For instance, some hedge funds will purchase sizable hotels that they can then develop and earn money from. Others invest in debt securities. The strategy that you want to take all depends on the kind of investment you believe will be most successful.

What is the Difference Between Hedge Funds and Mutual Funds?

Hedge funds and mutual funds are two similar forms of investing that come with distinct differences that you should keep in mind. Both of these methods for investing involve the formation of investment partnerships with many individual investors. A firm will manage portfolios that have been built from pooled capital with the primary goal of obtaining higher returns via greater diversification. When you invest into a mutual fund or hedge fund, it’s important that the investment strategy of the managing firm matches your investment strategy.

There are two key differences between hedge funds and mutual funds that you should be aware of. First of all, mutual funds are regulated by the SEC, which means that there’s a limit to how much leverage a mutual fund can take on. As opposed to liquid assets, leverage is borrowed capital that can be acquired when making an investment. Since there’s a cap on the amount of borrowed capital that can be obtained with a mutual fund, this type of investment is considered to be less risky when compared to hedge funds.

Since mutual funds are regulated by the SEC, they are available for daily trading and can be purchased by the public if you’re looking to buy shares in a mutual fund. Because real estate hedge funds aren’t regulated in the same way that mutual funds are, they are considered to be private investments that can only be purchased by accredited investors. The main benefit of investing in a real estate hedge fund is that you can generally obtain higher returns than are possible with a mutual fund. As long as you qualify as an accredited investor, a hedge fund is a way to take on more risk with your portfolio, and in turn, potentially higher yields.

How Do I Invest in a Hedge Fund?

While it’s possible for you to invest in a hedge fund, there are some basic restrictions and guidelines that you should be aware of before attempting to do so. The types of investors who can join the investor pool in a hedge fund must have the ability to make high risk investments. Regulation D places a limit on the number of investors who can join a hedge fund, which is why the investment amount for each is generally on the higher end. The managers and general partners of a hedge fund are in charge of setting minimum investment requirements.

While the minimum investment requirements differ with each hedge fund, they can be anywhere from $100,000 to $1 million. Since real estate hedge funds aren’t regulated directly by the SEC, most investors will need to be accredited. A small number of hedge funds are listed on exchanges, which means that shares of the hedge fund can be purchased via a broker or individually.

How can Hedge Funds Make Big Profits in Real Estate

Before you join a real estate hedge fund, it’s important that you understand the advantages and disadvantages that come with hedge funds.

Advantages of Hedge Funds

When you want to make money in real estate, a hedge fund provides you with the opportunity to bring in high returns for some potentially large profits. Since these investments can be made in a variety of ways with real estate hedge funds, it’s possible to obtain positive returns in both falling and rising markets. You can also customize your investment strategy in any way you see fit. These hedge funds are managed by some of the top investment managers in the world, which somewhat reduces the risk that comes with making such an investment.

Disadvantages of Hedge Funds

However, there are some negative aspects of hedge funds that you should be aware of. For instance, the losses can be substantial if the hedge fund fails and your investments don’t pan out. There’s also much more leverage in a hedge fund when compared to liquid assets, which heightens the risk of a hedge fund. Because hedge funds aren’t liquid, your money can be locked up for long periods of time.

In most cases, hedge funds will last around five years. However, it’s possible for a hedge fund to fail in less than a year. You should start to see returns for your investment after the first year depending on the terms of the hedge fund. The key to a successful real estate hedge fund is to join a reputable hedge fund management company.

Investing in Real Estate Hedge Funds

When you’re considering your many investment options, real estate hedge funds can be highly beneficial for your portfolio in a variety of ways. While hedge funds may be riskier than other investment methods, they also allow for the possibility of higher returns. If your portfolio is balanced, hedge funds are actually able to reduce the risk of your portfolio while increasing returns at the same time. There are also several different ways to invest with real estate hedge funds. Your investments can go into actual properties or can be invested into a REIT, which allows you to select the option that best matches your portfolio strategy.

A 401k is an investment savings account that’s sponsored by the employer of the individual who holds the account. Workers are able to make contributions to a 401k account via automatic payroll withholding, which means that the money will automatically be taken out of your paycheck and sent to your 401k account. Depending on the account you have, your employer may match a portion or all of your contributions.

Any money that’s placed into a standard 401k plan isn’t taxed until you withdraw the money, which usually occurs after retirement. If you invest in a Roth 401k plan, your withdrawals could also be tax-free. There are a couple of different types of 401k plans that you should be aware of, which include Roth 401k plans and solo/self-employed plans. A Roth 401k plan is a special type of 401k account that’s funded with your after-tax dollars up to a certain amount. Because the account is funded with after-tax dollars, eventual withdrawals don’t need to be taxed, which is the opposite of how a traditional 401k works. Both account types have their advantages and disadvantages.

Withdrawing From Your 401k

Before you start investing in a 401k, it’s important to understand how these accounts work when it comes to withdrawing from them. For one, anything that you withdraw from a 401k before you reach 59.5 years old will result in a tax penalty of 10 percent, which can make for a substantial reduction in your overall savings. You can make a standard 401k withdrawal if you are no longer an employee for the employer that sponsors your 401k plan and are at least 59.5 years old.

If you have invested money into a standard 401k, you will be required to pay income tax whenever you eventually withdraw your money. However, there will be no penalty applied to the withdrawal since you’re over the age of 59.5. After you reach the age of 72, you will need to take out the required minimum distributions from your 401k every year. The amount that you withdraw is based on an IRS formula that dictates the amount by the age you are at the time of the withdrawal. While you can always withdraw all of the money from your 401k account in one withdrawal, this can lead to a significant tax bill that you might want to avoid. If you’re still working in the same workplace, there are some plans that allow you to delay the required minimum distributions until the year that you retire.

Hardship Withdrawals

You should also know about hardship withdrawals when using a 401k account. A hardship withdrawal means that you can only withdraw money from your account without penalties for various emergency purposes in the event that you’re older than 59.5. The many different emergencies that would allow you to qualify for these penalty-free withdrawals include:

Up to 12 months of educational fees and tuition
Medical expenses for care and treatment that are deemed to be essential
Expenses related to a funeral or burial
Expenses that will allow you to prevent being evicted or foreclosed on
Home-buying expenses for a main residence

Being able to withdraw money from your 401k account without incurring a penalty in the event of one of these emergencies occurring should give you peace of mind about investing in a 401k.

Types of 401k Accounts

There are various types of 401k accounts that you should be aware of, which include both a Roth 401k plan and a solo 401k plan. The Roth 401k plan is considered to be highly advantageous for individuals who expect to be wealthier once they reach retirement age. Since the money that’s placed into the account can be withdrawn without requiring you to pay taxes, all of the money in your account once you reach 59.5 is yours to be withdrawn whenever you’d like.

The Roth 401k is among the latest types of retirement plans. While this is a special 401k plan, it provides investors with many of the benefits that can be received from a Roth IRA. The money that you contribute to the plan can’t be written off of your taxes, which means that you should weigh the pros and cons of a Roth 401k alongside a traditional 401k. If the tax benefits that you can receive now are more appealing to you, a traditional 401k might be your preferred option. On the other hand, a Roth 401k allows you to avoid the hassle of paying taxes when you eventually withdraw from the account. The type of 401k account that you select depends largely on your personal preference.

Using Your Solo 401k Plan to Invest in Real Estate

If you want to use your 401k account to invest in real estate, you will need to use a solo 401k plan. A solo 401k requires owners of the account to make contributions with their pre-tax dollars. These contributions can continue to grow within the account tax-free until you withdraw them for retirement. Keep in mind that there are limits to how much you can place into a solo 401k plan in a single year. For 2020, the limit is set to $57,000. If you’re currently older than 50 but have yet to retire, you can add an extra $6,500 per year above the $57,000 limit.

In order to qualify for this type of plan, you will need to be self-employed without having any employees that require W2 forms. However, it’s possible for your spouse to work with you. When you have a solo 401k, your investing possibilities will be broadened significantly since this type of account allows investments to be made in any asset that’s not disallowed under IRS regulations. The types of assets that you can invest in with a solo 401k plan include:

Deeds
Tax liens
Private loans
Private businesses
Limited liability companies

This gives you investment leeway that’s not possible with other 401k accounts. After you save for retirement for a certain number of years, you might want to think about investing in something with high returns and relatively predictable cash flow, such as real estate. By making these investments before you reach retirement age, you should be able to increase the amount of money that you have when you eventually retire. The types of real estate investments that you can make include:

Developed land
Residential property
Foreclosures
Commercial property

Each of these real estate investment opportunities can provide you with stable returns as long as you make smart investments. There are many benefits that come with investing money in real estate. These benefits are compounded when you invest in commercial real estate properties. The main reason that you should think about investing in real estate is that these properties generally appreciate in value over time, which allows them to increase in value with inflation. The average appreciation amount per year since 1968 is right around six percent.

If you invest your money into an apartment building, you can collect money from tenants, which will provide you with monthly payments. You could also make a debt investment in these properties, which would give you the opportunity to collect monthly payments from the interest on the loan that you’ve provided. Whether you like to make risky investments or safe ones, real estate investing accommodates both types of portfolios. Real estate gives you a predictable cash flow and offers equity growth via debt reduction. If you invest into the equity of a property and are in charge of upkeep for the building that you own, the money that you spend on maintenance, improvements, and property upkeep are considered to be tax-deductible, which you can use to reduce the amount of taxes that you owe each year.

Ready to Use Your 401k to Invest in Commercial Real Estate?

If you would like to use your solo 401k to invest in commercial real estate, it’s important that you focus on making the right investment decisions. The real estate that you invest in should be heavily researched so that you can be confident that the property and real estate market surrounding it are in good condition. While it’s not possible to eliminate all risk that comes with making an investment, the research that you do now should help you mitigate risk, which can assist you in maintaining a balanced portfolio.

If you’ve been thinking about investing in real estate, among the most important considerations of buying an investment property is having a real estate attorney by your side who can help you navigate this process. A real estate attorney is a professional who can use their skills to help you navigate through any legal hurdles that can occur when purc h asing an investment property. If there’s a lien on the property that needs to be taken care of or a dispute regarding the borders of the property, a real estate attorney should be able to make sure that these issues don’t stall your purchase of the property indefinitely.

A real estate attorney can provide their legal services before an investment property is sold, during the sale process, or after the purchase has gone through. The many situations where their expertise may be necessary include everything from providing recommendations of home inspection services to providing counsel if a problem happens to develop during the closing process. Issues can occur during the purchase of an investment property in the same way that they can develop when buying a home for your family.

While the purchase of an investment property may go through without issue, a top reason to consider hiring a real estate attorney is that they can review any purchase agreements, title documents, transfer documents, and mortgage documents. Even a small problem with this paperwork and documentation can put a delay in your purchase, which only serves to increase uncertainty. The real estate attorney that you hire should represent your interests completely throughout the entire transaction. The following is an in-depth look at what residential real estate attorneys do and why you should consider using one to purchase a home as an investment.

What Are Real Estate Attorneys and What Do They Do?

When you’re getting ready to buy an investment property, a real estate attorney can help you with any legal problems and hurdles that might develop during the process. Their assistance is similar to the assistance provided by a standard real estate agent in that they will work on your behalf to make sure the purchase process goes smoothly and that any issues are quickly ironed out. Even after you’ve made the initial purchase, it’s possible that legal issues will occur. If ever they do, a real estate attorney can help determine what legal steps you should take. The attorney you hire should always represent your interests, which means that you can be confident in the counsel they provide.

Real estate attorneys benefit investors because they can effectively handle almost every facet of the process, which gives the investor time to focus on how they’ll be able to get a return on the investment. While you’ll still need to sign any paperwork and gather any of the necessary documentation for buying an investment property, a residential real estate attorney can make sure that the actions you take throughout the purchase process are the right ones. As an investor, a real estate attorney is a great way to lessen the risk of your investment.

Using a Residential Real Estate Attorney Prior, During, and Post Sale

When you hire a residential real estate attorney to assist you during the purchase of an investment property, you’ll find that they can help you before, during, and after the sale. With an attorney by your side through all three phases of purchasing an investment home, the process should be a relatively straightforward one. If you run into a problem before or during the sale of an investment property, a residential real estate attorney should be able to provide you with the representation you need to continue with the sale.

Prior to the Sale of a Home

Likely the most beneficial service that a real estate attorney can provide before the sale of a home is reading the entirety of your real estate contract to make sure that it’s worded perfectly and doesn’t include any language that goes against your interests. If there are any liens that are currently on the home, a real estate attorney should be able to handle the legal issues surrounding the lien, which would allow you to go forward with the purchase.

Before you purchase your investment property of choice, a real estate attorney can also help you by checking the property title for any issues and by providing informed recommendations of home inspection services that you can use. If you want to be certain of the value of your investment property, a home inspection is essential to make sure that there are no underlying problems with the quality or structure of the home. Having a real estate attorney help you during the selection process should allow you to make the right purchase decision.

During the Sale of a Home

Once you’ve made an offer on an investment property, a real estate attorney can guide you through the closing process, which can last anywhere from 15-60 days. For instance, a real estate attorney may be able to attend the closing of the property with you, which will allow them to handle any issues that might arise during this process. While the closing process should go smoothly once you’ve made an offer on the investment home, there’s always a possibility that a legal issue could develop. In this situation, the issue should be resolved much quicker if you already have a real estate attorney at your side.

Another benefit of hiring a real estate attorney for the closing process on your investment home is that they can check any closing documents for errors that have been made. In the event that an issue occurs during the closing period, your real estate attorney can provide you with counsel on whether the closing should continue. They might recommend that you back out of the deal, which could help you avoid making a bad investment. Once the sale goes through, they will also make sure that the deed is recorded correctly.

After the Sale of a Home

There are many things that a residential real estate attorney may be able to assist you with following the sale of the home. One of the more common issues that develops after buying a home is finding out that there’s a problem with the property that the previous owner didn’t inform you about. If the seller had a duty to properly expose these defects, a real estate attorney can handle any kind of litigation that occurs. The types of defects that might result in litigation include ones that relate to the driveways, grounds, and property.

If your investment property is being rented out, a real estate attorney may be able to help you by drafting lease agreements. If a dispute arises pertaining to the borders of your property, you can also retain the assistance of a real estate attorney to help you in this matter. In the event that a foreclosure is necessary, a real estate attorney can assist you in exploring all of your legal options, which can include everything from a mortgage modification to a short sale.

Why You Need a Real Estate Attorney as Part of Your Real Estate Investment Strategy

Real estate investment is already difficult when you’re just trying to find the right homes to invest in that will provide you with a significant return. This process can be made much more complicated if you’re left to handle the entire purchase of the home by yourself. As mentioned previously, there are many areas where a real estate attorney can act as a guide that will help you avoid making a costly mistake.

Among the more beneficial aspects of hiring a real estate attorney is that their services can be provided before, during, and after the purchase of an investment property. If a real estate attorney doesn’t help you by reading the initial sale contract, you could overlook poor terms that would make the purchase a bad investment. During the purchase of a home, an attorney can provide you with counsel on what to do when a problem develops within the closing process.

When you’re purchasing a property as an investment or to expand your investment portfolio, you’ll be better off with a real estate attorney because they can effectively guide you through every step of the process. This guidance should help you navigate any hurdles that arise and keep you from making mistakes that could cause you to later regret your purchase. Without a real estate attorney, the process of buying an investment property can be much more chaotic and may even last longer. However, it’s not enough to just decide to hire a real estate attorney. It’s also important that you find an attorney who will provide you with premium representation and has experience in handling legal matters pertaining to investment property.

Finding The Right Residential Real Estate Attorney

Now that you know how important it is to have a real estate attorney by your side when buying an investment property, it’s time to look at how to find an attorney who you can be confident will provide you with quality representation. It’s highly recommended that you begin searching for a real estate attorney at the same time that you start looking at potential investment homes to buy. If you have any friends, family members, or coworkers who have engaged in real estate investment in the past, ask for a referral.

It’s also easy to perform some online research before narrowing your list of potential attorneys down to 3-5 options. When you type an attorney’s name into a search engine like Google or Bing, you should be able to find reviews and online referrals pertaining to the attorney in question. This is also a great opportunity to identify any red flags that may push you towards choosing one attorney over another.

After you have narrowed your search, it’s time to conduct in-person interviews with the small list of real estate attorneys that you’ve created. During the interview, you might want to inquire about their fee schedule, the amount of experience they have, the number of real estate transactions that they’ve closed, and any possible conflicts of interest. You should also think about asking for a list of references that you can check before making your final decision.

An accredited investor is someone who qualifies to invest, deal, and trade in financial securities and has a special status under financial regulation laws. The SEC has determined that there are two main criteria that can be used by an individual to become an accredited investor.

First, someone who has earned income of more than $200,000 or a joint income with a spouse of more than $300,000 over the past two years can qualify as an accredited investor. However, this qualification can only be provided if the individual expects to earn a similar income over the next year. Individuals can also be accredited investors if their individual net worth or their joint net worth is over $1 million when the investment takes place.

Avenues to Verification

Additional methods of verifying that you’re an accredited investor are also available if you don’t qualify for the net worth or high-income methods. When you are deemed to be an accredited investor, you can invest your money into non-registered investments that are provided by venture capital firms, private equity funds, and hedge funds. If you want to invest in the previously mentioned funds, the following article provides a guide on how to become a verified accredited investor.

Are You An Insider?

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An individual can be an accredited investor if they are a director, general partner, or executive officer of the issuer of the securities that are being sold or offered. While the majority of accredited investors receive this designation because of their income level or net worth, people who are directly tied to the unregistered security can also receive this designation. An unregistered security is any kind of stock, bond, or note that has yet to be registered with the SEC to be sold to the public. Being an accredited investor means that you can purchase these securities before they have been made available to the public.

Evidence Required to Prove Insider Standing

When you attempt to purchase an unregistered security from a hedge fund or private equity fund as an insider, you will be required to provide evidence that you are a director, general partner, or executive officer of the security in question. This evidence can be in the form of resolutions, incumbency, governing documents, or similar certificates. Anything that can prove that you are in an insider position may be accepted as evidence to prove insider standing.

There are times when this evidence could be publicly available via research reports, securities filings, or other kinds of information that are available through third-party sources. While only a small selection of individuals will qualify to be accredited investors through this method, it’s considered to be the easiest way to get verified.

Obtain a Professional Letter

You can also become an accredited investor by providing a professional letter as proof, which must be provided to you only by qualified individuals. These individuals include:

A registered broker-dealer
A licensed attorney who is currently in good standing
An investment adviser who is registered with the SEC
A certified public accountant who is currently registered and is in good standing

What Does This Professional Letter Have to Say?

The professional letter that’s provided to you should state that logical steps were taken to determine that you are an accredited investor within the previous three months and that you were found to be an accredited investor. If you have a lawyer or accountant by your side who is able to provide this statement, you would be able to go through the verification process without needing to spend a significant sum of money. However, you may need to pay a small fee to obtain a professional letter.

It is also possible that the lawyer or accountant you work with won’t feel comfortable with providing this letter. One reason may be that these individuals have qualms about issuing a professional letter due to liability concerns. If this is the case, you may need to focus on becoming a verified accredited investor by showing evidence of high income or high net worth.

Does Your Yearly Income Qualify?

Likely the most common way to become a verified accredited investor is by having a certain income level. You can be deemed an accredited investor if you have earned income that exceeds $200,000 for both of the last two years.

The same is true if you have earned joint income with your spouse which is more than $300,000 for the past two years. However, the income level verification can sometimes be difficult to obtain because you will be required to prove that you have a reasonable expectation of earning the same level of income in the current year. If you are unsure of the security of your employment in the future, it might be better to attempt to become a verified accredited investor via your total net worth.

It’s important to note that your income will need to be obtained in the same way for both years. You won’t be verified if you earn more than $200,000 as an individual for one year but make over $300,000 as joint income for the next year. Let’s say that you make $250,000 for the first year while your spouse makes next to nothing. This indicates that you would eventually become an accredited investor by displaying over $200,000 with individual income. If the second year has you making $150,000 while your spouse makes $200,000, you wouldn’t qualify as an individual but would instead only be above the joint income threshold of $300,000.

Even though you make more than $200,000 in both years, the money needs to be earned the same way both years in order for you to become verified. An exception to this rule is allowed if you get married or divorced during the two-year period but still meet the $200,000 or $300,000 threshold.

Evidence Required for Proof of Income

The easiest way to provide evidence that’s required for proof of income is to provide official or government records that display your income, which could be your regular pay stubs or your yearly tax filings. If you are unable to provide this documentation, it’s also possible to obtain a letter from your employer or accountant who confirms that your wages or annual income are higher than $200,000 or $300,000 with a joint income. If you need to request this letter, make sure that your employer or accountant also provides evidence that you will be able to maintain this income for the current year. Along with this letter, you must make a statement that you believe your income level will be above the threshold for the current year.

Are You Considered a High Net Worth Individual?

You can become an accredited investor by proving that you have a high net worth, which means that your individual net worth or joint net worth with your spouse will need to be above $1 million. The main issue with making this calculation is that the positive value for your main residence isn’t directly counted when your total assets are being calculated. While the value of your home isn’t counted, any debt that was incurred over the past 60 days with your main residence will be subtracted from the value of your total assets. This method can be very simple to calculate if you happen to have zero liabilities and practically all of your assets within a single bank account. Otherwise, you’ll want to weigh the pros and cons of each option.

Evidence Required to Prove High Net Worth

While it might seem like proving high net worth would be the easiest verification method for becoming an accredited investor, it’s important to understand that you will be required to disclose both your assets and your liabilities so that the net worth can be calculated. It’s not enough to have more than $1 million in assets. It’s also important that the number of liabilities you currently have don’t lower your total worth to below $1 million.

There are three separate factors that are used when verifying that you have a net worth of more than $1 million. The first factor involves the credit report for yourself and your spouse, the latter of which is only necessary if you’re attempting to qualify for the high net worth verification through joint net worth with your spouse. If a U.S. credit report can be accessed, it should be provided. If you don’t have a credit report tied to your name, you will be required to explain why there isn’t a credit report, which can make verification difficult.

The next step in proving your net worth is disclosing all of your liabilities. If you have any liabilities, they will be deducted from your net worth. If you believe that there aren’t any liabilities tied to your name, you must make an affirmative statement that you don’t have liabilities. The final step involves disclosing all of your assets. When you disclose your assets, you will need to support them with documentation that shows you are the rightful owner of the asset. The asset’s value should also be calculated.

Different assets have different guidelines when you’re attempting to calculate your net worth. For instance, any insurance policies or annuities that you have could have a cash value to them, which means that they could be used as assets. For any bank accounts or certificates of deposit, you should provide your latest statement that displays the value of the account. If you gather the right documentation, you should be able to use nearly all of your assets as proof that you are a high net worth individual.

Diversifying Your Investment Portfolio As an Accredited Investor

Are you an accredited investor looking to diversify your portfolio? If so, consider investing in commercial real estate with AB Capital. With more than 75 years of combined experience, our professional staff has the experience and knowledge that are needed to assist customers with their investment needs. The main types of investment opportunities that we facilitate are secured investment opportunities for real estate.

There are multiple investment options that you can select from if you wish to diversify your portfolio. For instance, you could choose to invest in residential real estate or commercial real estate depending on your preference and the type of return you’re expecting. Our team can help you determine which investment strategy is right for your portfolio. Contact AB Capital today to get started!

Real estate investing is a highly varied investment strategy that involves the purchase or sale of real estate in order to gain profit. Once real estate is invested in, it’s also possible to own, manage, or rent the property depending on the exact strategy you would like to use. There are many different ways that an investor can place money into real estate, which includes everything from real estate trading to real estate investment trusts.

One notable type of real estate investing is debt investing with real estate, which involves providing borrowers with loans that they can use to purchase or develop real estate. You could also choose to invest in mortgage-backed securities as a form of real estate debt investing. When you invest in real estate debt, your investment is backed by the real estate asset serving as collateral. One notable form of debt investing involves placing money into a real estate debt fund, which is a popular type of investment pool that can net you a stable return.

You could also choose to make equity investments, which involve purchasing an asset that will provide you with a profit that’s dependent on the performance of the asset. One notable aspect of investing in equity is that you will be entitled to a specific share of the capital that’s gained by the asset. While there are a wide variety of different kinds of equity investments, one notable example is purchasing and managing a rental property where you gather income from the monthly payments that each renter must make.

One main difference between these investment types is that equity investors continue making money off of the asset as long as it performs well, which isn’t the case with a debt investment. If you’re currently interested in investing in real estate but are unsure if equity investments or debt investments would be better for your portfolio, the following article will go into detail about the pros and cons of each.

Pros and Cons of Debt Investments

Debt investments are an option for investors who want to better balance the overall risk of their investment portfolios. When you invest in debt investments for real estate, you will be acting as the lender to the property owner or the sponsor of the deal. While there’s always a chance that the borrower will not deliver the results that you expect from them, the loan is directly secured by the actual property, which means that you will be able to take control of the property if the borrower defaults on the loan.

When investing in debt, you will receive a fixed rate of return that’s determined by the interest rate on the loan and by how much money you have invested. Even though the fixed rate of return that you receive depends mostly on the interest rate that is set for the loan, it can be beneficial to know that you’ll obtain the same payments each month.

There are a wide variety of positives that come with investing in debt, the most notable of which is that these investments are considered by many to be safer than equity investing. The loan that you make will be secured by the property that the borrower wishes to purchase, which allows the property to be used as a kind of insurance policy for repayment of the loan. If the sponsor or property owner happens to default on the property, you can recoup the losses of your investment by foreclosing on it.

These loans generally have a much shorter hold period. Debt investments are usually associated with actual development projects, which means that the loan should be paid back in full at the completion of the project or soon thereafter. The holding period attributed to most debt investments is anywhere from six months to a couple of years. If you want to maintain a high amount of liquidity in your portfolio, this is a good form of investment. Another benefit of investing in debt is that it provides you with a steady income that’s predictable. Whether you are paid monthly or quarterly, you will know the frequency of the payouts you receive as well as the amount that you will receive since it’s based on the interest rate that has been set for the loan.

While there are numerous positives to investing in debt, there are also a few problems that you should keep in mind. Unlike equity investments, the debt investments that you make have a capped return. The returns you obtain are limited by the set interest rate, which means that equity investments have the potential of providing higher returns. There are also significant fees that come with participating in debt investment crowdfunding. The platform will take a small percentage of the money that’s earned through crowdfunding.

Pros and Cons of Equity Investments

An equity investment is a form of investing where the investor acts as a shareholder in the property that they’re investing in. The stake that they have in the property directly correlates with the amount that they’ve invested. The most notable aspect of investing in equity is that returns are obtained in the form of a certain share of the income that the property is able to generate from the rental payments. The amount that you receive is reduced slightly depending on the exact platform that you use to make the equity investment. Investors can also receive payments from the share that they have in the event that the property is eventually sold. These payments come directly from any amount of appreciation on the property.

There are many positives that come from investing in real estate equity. For one, these investments have the ability to generate high returns. These returns could be as high as 20 percent or greater. If the property is successful, its value could increase, which would lead to you receiving even more profit than you had anticipated. It’s also important to note that there is no cap on returns, which theoretically gives you the ability to make a large profit in comparison to your initial investment. If the asset happens to perform exceptionally well, you will be able to reap the benefits.

While equity investing is great if you want to maximize your returns, the main issue with investing in equity is that it often requires a lengthy hold period, which refers to the time between your purchase of the asset and your eventual sale of the asset. Holding onto an equity investment for a lengthy period of time may not be advisable if you’re interested in maintaining a high amount of liquidity in your portfolio.

Another negative aspect of investing in equity is that this type of investment comes with a high amount of risk. The property that you invest in could do poorly or fail altogether. When this occurs, the debt investors will receive payment before you, which reduces the possibility that you will get back the money that you’ve invested. Additionally, if you expect to receive monthly rental payments but find that your renters aren’t making their payments on time or that the property itself is considered to be undesirable for renters, you may not be able to obtain the kind of returns you’re looking for.

While both equity and debt investments have their pros and cons, the investments that you make largely depend on what would be best for your portfolio. When investing in equity for a real estate project, it’s possible that you will receive high returns in the event that the property performs well. As the owner of the property, you will also have direct control over many aspects of how the property performs, which means that it’s possible you could turn around a failing property. If you would rather invest in debt, these are many investments that yield stable returns and can help to diversify your portfolio.

If you are currently investing in real estate or would like to do so in the near future, you might wonder if it’s necessary to obtain a real estate license to assist with your investments. A real estate license can help you save more on commissions while also increasing your income. But do you require a real estate license in order to make investments in real estate? The answer to this question is no, but this does not infer that it would be a bad idea to obtain a real estate license.

Even though it’s not required that you obtain a real estate license before making investments in real estate, doing so can provide you with a range of notable benefits. This article focuses on the many advantages that come with a real estate license, which should help you determine if getting a license is right for you.

Benefits of Obtaining a Real Estate License

There are multiple benefits that you can obtain by applying for a real estate license. Some of these benefits include:

You’ll gain access to many more deals
Your contact network will grow and expand
You can earn additional income via commissions
You will be able to have more control when investing in real estate

Multiple Listing Services

The most notable benefit of obtaining a real estate license is that you will have access to multiple listing services (MLS), which is a comprehensive database created by various real estate brokers to provide each other with extensive data about properties that are listed on the market. The goal of this service is to make sure that brokers can easily connect buyers with sellers. The MLS also helps to facilitate broader networking among real estate brokers in the industry.

table with piggy bank, magnifying glass and toy house

The real estate brokers and agents who pay membership fees are able to access an MLS. In return for the fee, real estate agents can obtain information on the properties that can be found in a specific area. This information includes complete listings, numerous photos, and details like property amenities and square footage. Keep in mind that only licensed brokers and agents are able to access an MLS, which is why it’s recommended that you obtain a real estate license before investing in real estate. While each specific MLS has its own procedures, they usually follow the rules and guidelines that have been set by the National Association of Realtors.

The rules that have been created by this association dictate that each listing will need to display the amount of commission that was earned for the seller. This commission is shared with the other broker or realtor who set up the introduction with the buyer. Multiple listing services are beneficial to both the buyer and seller. For the seller, the MLS provides them with more exposure for the property they are attempting to sell. On the other hand, buyers have many more options at their disposal and should be able to more readily find the right home. These services also help to even out the playing field by making sure that smaller brokerages are able to compete with larger ones.

You Earn Commission

The commission that a real estate agent gets refers to the fees that the agent is owed when the property is sold. The agent earns a commission when a buyer purchases the property as long as they represent the buyer. The agent for the buyer can submit offers for the property and negotiate with the listing agent. They also deal directly with the home appraisers, inspectors, closing attorneys, lenders, and any other party that takes part in the closing of the transaction. You will also be in charge of marketing, sales, and showing properties to prospective buyers.

If you decide to obtain a real estate license, you will be able to forego using a real estate agent when investing in a property, which means that the standard commission fees they receive won’t come out of your pocket. Instead, you will act as the agent, which means that you can make money by facilitating the transaction. The commission fees that you should expect to receive typically amount to 2-3 percent of the property value. However, you’ll likely need to negotiate the commission split when you sign on with your brokerage.

The majority of brokerages have a base commission split that’s offered to newer agents. Eventually, you will have a significant amount of experience as a real estate agent, which may come with an increase in the commission split that you receive. High amounts of production may also lead to an increase in your commission split. In any regard, having a real estate license allows you to make a commission that would otherwise be unavailable to you when investing in a property.

You Are in Control of Your Real Estate Investments

Likely the best aspect of getting your real estate license is that you will be in control of your real estate investments. When you invest as a real estate agent, all aspects of the transaction go directly through you. Without this license, you would likely need to work with a real estate agent to negotiate and submit offers, which also means that you wouldn’t obtain a commission from the property being sold. When a deal has been reached and the property is being closed on, you can also be directly involved with every element of this process, which means that you would speak directly with home inspectors, closing attorneys, appraisers, and lenders. Before you obtain a real estate license, it’s important that you understand what the process involves when working with a buyer or seller.

When you work with sellers, you will be tasked with meeting with the seller and understanding their needs. Throughout the transaction, it’s up to you to display your knowledge of the market, your negotiation skills, and your marketing abilities. Among the most important tasks for a real estate agent is to set the right listing price, which will involve studying the local real estate market and comparing the main property with other properties in the area. Once the right price has been reached, it’s time to list the property with any relevant listing service. In order to provide a comprehensive listing, numerous photos will need to be taken of the exterior and interior of the property. Finally, it’s important to stage the home correctly so that prospective buyers find it appealing.

Working with a buyer is an entirely different process and typically involves meeting with and understanding the needs that the buyer has when searching for a home. The information that you obtain from the buyer can then be used on the MLS to identify properties that match these specifications. Once the right property has been identified, you will need to plan a showing of the property while working around the buyer’s schedule. When showing a property to the buyer, make sure that you communicate every feature that they might be interested in. While touring the property, you will also have an opportunity to talk with other agents, which might allow you to obtain useful information. If the buyer is interested in the property, all that’s left to do is to make a purchase offer, which will likely lead to negotiations with the seller’s agent. During these negotiations, you will need to negotiate on behalf of the buyer’s interests.

Want to Diversify Your Real Estate Investment Portfolio?

Obtaining a real estate license can be highly beneficial when you want to build a strong and steady investment portfolio. With this license in hand, you should have a much easier time identifying properties that would make a good investment since you will have access to multiple listing services. You will also have direct control over the entire selling or buying process, which should make it easier for you to negotiate the kind of deals that you want. By acting as the real estate agent, you should make a sizable commission by connecting a buyer to the seller, which would otherwise be impossible. Even though it’s not exactly necessary to have a real estate license before you invest in real estate, it can potentially be more rewarding for you and your investment portfolio.

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:

Fundrise ($500 Minimum)
Realty Mogul ($5,000 Minimum)
CrowdStreet ($10,000 Minimum

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)

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

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.

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

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.

A social return on investment is a methodology that businesses, organizations, and high net-worth individuals can use to account for the value they generate that can’t be accurately displayed with financial statements, which includes environmental and social value. By using the SROI measurement method, companies have the ability to identify how effectively they are using their resources to produce value for the surrounding community.

It’s important to understand the SROI of your investments or the projects you’re funding because this information will allow you to maximize the returns on your initial investment. When companies know how to calculate the SROI of various social, economic, and environmental developments, they can improve project management for these creations. Having a clearer understanding of how the business affects the surrounding community will allow the company to more effectively communicate the value of their work to the members of this community. This information can also be relayed to internal or external stakeholders.

This type of measurement is commonly used by venture capitalists, non-profits, and philanthropists to monetize the social impact that they have. If you invest significant amounts of money into social projects and developments, you may want to use the SROI methodology to determine what effect you are having on the greater community. When you’re looking to expand your social return on investment, there are seven principles that you should consider following if you want to arrive at an accurate measurement of the social change that you have created. The following will provide a closer look at what a social return on investment is and why you should consider using it.

What is Social Return on Investment?

A social return on investment is a kind of methodology that allows businesses and individuals to determine how much social change has occurred because of their investment or similar activity. If the brunt of your investments go into philanthropic institutions or are used to develop programs and projects that are aimed at helping the greater community, it can be difficult to know whether or not you’re making a difference. The SROI methodology provides you with the ability to measure how much your investment affected the outcome.

If you find that your investments aren’t as impactful as you hoped that they would be, you can use this information to make better decisions in the future that should improve your overall impact. If you want to communicate with the stakeholders involved in your investment, an SROI will allow you to do so with tangible information. Before you start using the SROI methodology, you should know that there are two separate SROI types, which include a forecast SROI and an evaluative SROI. No matter which SROI type you use, there are seven guiding principles that comprise an SROI. These principles include:

Involve stakeholders
Understand what changes
Value the things that matter
Only include what is material
Do not overclaim
Be transparent
Verify the result

1. Involve Stakeholders

The stakeholders in this situation are individuals or groups that are directly affected by the activity or program that you’re currently implementing. The economic, social, or environmental changes that you or your company are creating will affect a stakeholder. When you’re looking to use the SROI methodology, it’s important that you properly identify any stakeholders and consider them to be active participants throughout the entirety of the SROI process.

2. Understand What Changes

In order for the SROI methodology to work as intended, you will need to understand more about the changes that have occurred and whether they were negative or positive. Regardless of whether you expected these changes or didn’t even consider them, knowing what changes have occurred from your investment will allow you to better understand what the return on your investment is.

3. Value the Things That Matter

This principle involves placing monetary value on the outcomes that have resulted from the change you’ve generated. By assigning monetary value to the social, economic, or environmental changes that you’ve influenced, you can more effectively identify how much return has been generated from your initial investment.

4. Only Include What is Material

It’s important that the information you include when performing your SROI methodology is relevant to the interests of the stakeholders. For instance, you should include the outcomes of a specific activity as well as the parties involved in affecting change or being the recipient of this change.

5. Do Not Overclaim

While you’ll want your investments to enact significant social, economic, or environmental change, it’s essential that you don’t overclaim by making it appear as though you created more positive change than you actually did. The SROI accounting process involves asking questions about what would have occurred without your activities, how much your activities contributed to the eventual outcomes, and how much other entities may have contributed to the generated outcomes. Answering these questions allows you to provide your stakeholders with a wholly accurate representation of the value you provided.

6. Be Transparent

Every facet of the SROI methodology calls for transparency, which involves everything from conducting an analysis on your activities to communicating with your stakeholders about the results of your SROI. Your transparency can play a significant role in how your stakeholders react.

7. Verify the Result

Once you’ve completed your SROI analysis, you should verify the results via an extensive process known as independent assurance. By performing an external validation of your SROI results, your stakeholders can more accurately measure the outcomes of the change that you’ve created.

Forecast SROI vs. Evaluative SROI

If you’re interested in expanding your social return on investment, there are two SROI types that you can use, which include a forecast SROI and an evaluative SROI.

Forecast SROI

A forecast SROI is one that you can use before the activity or program has occurred. This form of analysis is beneficial when you want to gauge and predict how an investment by yourself or your company will perform in regards to social change in the surrounding community. If you’re getting ready to fund a project that you expect will result in a certain amount of social, environmental, or economic change, a forecast SROI is a great way to determine if you’re making a sound investment.

Along with being able to predict the amount of social value that a project will have, a forecast SROI is also a great way for organizations and individuals to implement the infrastructure that’s necessary for precisely measuring change. This infrastructure includes data collection processes and relevant indicators. With this infrastructure in place, you can continue to perform SROI analyses with ease throughout the duration of the project. Obtaining an SROI analysis before the project occurs should also help you leverage your capital for the highest impact.

Evaluative SROI

An evaluative SROI is designed to be held once an activity or program has had a reasonable amount of time to properly affect change. While a forecast SROI may not always be precise because of how it relies on predictive information, an evaluative SROI is only used when there are already some outcomes that can be measured with this methodology.

You should consider using an evaluative SROI in situations where you’re already tracking data related to the outcomes of the activity or project. You need this data in order to perform an evaluative SROI. If the program that you invested in involved donations of money and time, an evaluative SROI can be performed as long as you measure the amount of time and money that’s being donated. With the results that you obtain, you should be able to determine if your initial investment provided you with the results you wanted.

How Can SROI Help You?

There are a myriad of benefits that are provided to you when you perform an SROI, the primary of which is that this analysis allows you to know if you’re actually making a difference. Unless your investment is a one-time deal, an SROI can also provide many additional benefits. If you perform a forecast SROI, you should be able to identify how much social change your investment or project will cause. If the analysis doesn’t provide you with the results you wanted, the information from this SROI can be used to make better investment decisions in the future. If you want to make sound investment decisions that make an economic, environmental, or social difference, an SROI should provide you with a useful calculation.

Along with using an SROI to plan your investments and help you determine what to spend your money on, you might also want to perform an SROI to better communicate the social impact of your investment to your stakeholders. Without conducting an SROI, it’s practically impossible to provide concrete data about how you or your company is affecting the community around you. When you perform an SROI, you will be generating value for your stakeholders, obtaining the information needed to improve the social impact of your investments, and increasing your overall transparency with stakeholders. When your stakeholders are provided with this information, they will be able to hold you accountable while also involving themselves meaningfully in the project at hand.

Resources to Carry Out an SROI Analysis

If you’re ready to carry out an SROI analysis, there are many excellent resources that you can take advantage of. For instance, if you navigate to the Social Value Self-assessment Tool, you will be able to use this tool to determine how well you are currently measuring your social value and reporting on it in accordance with the seven principles of an SROI. Some of the establish calculators in the industry include the Social Impact Calculator, the Inclusionary Housing Calculator, and the Social Value Bank Calculator.

If you’re interested in joining a wider network that aims to improve the way social value is measured, you could become a member of Social Value International. To better understand how outcomes are generated, you can view outcome reports for home ownership, SMEs, vehicles, and women employment. A great guide that can help you measure your SROI can be found at this NEF Consulting page, which offers extensive tools and resources. With these resources in hand, it should be relatively simple for you to accurately measure the social impact of your investments.

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