From REI Academy
Direct real estate investing involves ownership of real property.
If the property is income producing, such as single family homes,
apartments, office buildings, warehouses or retail centers, the
investor must be involved in the day to day management of his
property. If the property management is out sourced the investor
gives up a significant portion of his return to the management
company; further the property manager must still be managed and
major decisions affecting the property such as repairs, capital
improvements, expenditures, market positioning, timing of sales,
rent rates etc., must still be made by the investor. If the investor
is a rehabber or flipper, real estate becomes more of a business
rather than an investment. Many successful real estate "investors"
are actually real estate "operators" in the real estate business.
Perhaps you, like I, want to capture the high yields and
potential capital appreciation of investing in real estate, but
don't want the management hassles and time commitment involved in
direct property ownership. Maybe you have a full time job or
business, or perhaps your retired looking for greater income than
bank CDs and greater security than a volatile stock market. Or
perhaps like me, having owned income producing property for many
years, you're tired of "tenants and toilets". If so, consider
indirect real estate investment, i.e., investing in real estate
securities.
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Types of Real Estate Securities
REIT's
Real Estate Investment Trusts are companies that own, manage and
operate income producing real estate. They are organized so that the
income produced is taxed only once, at the investor level. By law,
REITs must pay at least 90% of their net income as dividends to
their shareholders. Hence REITs are high yield vehicles that also
offer a chance for capital appreciation. There are currently about
150 publicly traded REITs whose shares are listed on the NYSE, ASE
or NASDAQ. REITS specialize by property type (apartments, office
buildings, malls, warehouses, hotels, etc.) and by region. Investors
can expect dividend yields in the 5-8 % range, ownership in high
quality real property, professional management, and a decent chance
for long term capital appreciation.
Real Estate Mutual Funds
There are over 100 Real Estate Mutual Funds. Most invest in a
select portfolio of REITs. Others invest in both REITs and other
publicly traded companies involved in real estate ownership and real
estate development. Real estate mutual funds offer diversification,
professional management and high dividend yields. Unfortunately, the
investor ends up paying two levels of management fees and expenses;
one set of fees to the REIT management and an additional management
fee of 1-2% to the manager of the mutual fund.
Real Estate Limited Partnerships
Limited Partnerships are a way to invest in real estate, without
incurring a liability beyond the amount of your investment. However,
an investor is still able to enjoy the benefits of appreciation and
tax deductions for the total value of the property. LPs can be used
by landlords and developers to buy, build or rehabilitate rental
housing projects using other peoples money. Because of the high
degree of risk involved, investors in Real Estate Limited
Partnerships expect to earn 20% + annually on their invested
capital.
Real Estate Limited Partnerships allow centralization of
management, through the general partner. They allow
sponsors/developers to maintain control of their projects while
raising new equity. The terms of the partnership agreement,
governing the on-going relationship, are set jointly by the general
and limited partner(s). Once the partnership is established, the
general partner makes all day to day operating decisions. Limited
partner(s) may only take drastic action if the general partner
defaults on the terms of the partnership agreement or is grossly
negligent, events that can lead to removal of the general partner.
The LPs come in all shapes and sizes, some are public funds with
thousands of limited partners, others are private funds with as few
as 3 or 4 friends investing $25,000 each.
High Yield Private Mortgage Notes
These notes are fully collaterized by income producing real
estate, and are used by the professional real estate investor for
the acquisition, rehabilitation or equity cash out of residential
and commercial properties. Investors have the opportunity to obtain
above market returns of 12 - 14% in first trust deed positions and
15 - 18% returns in second trust deed positions. These loans are
usually for duration of one year and provide a monthly income with
interest only payments.
These loans never exceed 65% of the current appraised property
value. Private Mortgage Brokers originate these loans, and are able
to obtain these high yields because of unique advantages they offer
to the professional real estate investor. They are able to close
most loans in 2 weeks or less whereas institutional lenders require
6 weeks or more to close and fund a commercial mortgage loan.
Further these loans are asset based; the real property itself is the
basis of the lending decision. Hence, if the property is producing
sufficient income to pay the note interest and the value of the
property will fully secure the note and provide sufficient equity,
then the borrower's credit is not an issue. Instead of concentrating
on minute detail of the borrowers credit history as institutional
lenders do, private mortgage note holders concentrate their due
diligence efforts on the real estate securing the loan. They provide
a borrower with the ability to borrow on underwriting criteria not
available through institutional lenders, hence investors in private
mortgage notes are able to receive much higher yields with no
increased risk.
For additional information on the above, check out these
websites.
REITS - www.nareit.com
Real Estate Mutual funds - www.nareit.com, www.finance.yahoo.com
Real Estate Limited Partnerships - www.bobpolo.com
High Yield Private Mortgage Notes -
www.privatemortgagefinancing.com
Don Konipol
Don H Konipol has a BS in Economics and an MBA in Finance from
the University of Michigan and is a licensed Texas Real Estate
Broker and Mortgage Broker. Mr. Konipol is General Partner of the
Managed Mortgage Investment Fund LP, a private limited partnership
that invests in short term, high yield private mortgage notes. He
can be reached at 832.577.8838 or by email at dkonipol@yahoo.com.
