7. Investing in land
Advantages of investing in land:
- Less expensive than buying developed property, but more speculative
- A choose-your-own-path investment method with multiple outcomes
- Requires a lot of foresight
Investing in land is a blank canvas upon which you can paint a real estate masterpiece. The trouble is that there aren’t a lot of Bob Rosses out there who can successfully translate what they see in their mind into something tangible.
What makes investing in land unique is that there's a multitude of outcomes. You can
- sit on it,
- cut it up into subdivisions,
- transform it into developed or arable plots, or
- have it re-zoned for an entirely new purpose.
At any point along the way, you can sell or continue down this path until you can collect revenue in the form of rents or whatever you can reap from the soil.
Since raw land usually requires lots of capital to develop, cultivate, or harvest, the actual cost of land is low relative to buying a developed property. It’s what comes after the initial sale that makes costs pile up. If you intend to buy land, know that you could rack up large expenses to make it a marketable product.
Another unique aspect of buying land for investment is that it can be more speculative than purchasing a finished product. It takes longer to get land properly zoned and get all the permits necessary to build -- and the market could change during that time. Taking on a land investment requires additional foresight into market trends that novice investors have yet to hone.
How to invest in land
You can buy land in the same ways you can acquire a developed property. Many raw land listings can be found on the multiple listing services (MLS) and working with a real estate agent.
Raw land can also be held in certain tax-advantaged accounts like self-directed IRAs, but the tax rules are similar to those on other property investments.
8. Buy real estate owned (REO) or foreclosed properties
Advantages of investing in foreclosures:
- Special situations where you can acquire properties at steep discounts
- Can significantly boost rates of return for any kind of property investment
- Complex legal processes and much higher risk involved; not recommended for beginners
Buying foreclosed properties is similar to buying any other property, but it's a unique strategy that can be used on all types of real estate investments. With a little extra research and due diligence, buying foreclosed or REO properties to rent out or fix and flip can boost your returns.
Foreclosed and REO properties are cut from the same cloth: They're properties where the borrower is in default and the lender has repossessed the property for sale. Foreclosed properties are sold at auction. Properties that aren't sold at auction remain the property of the lender and become REO properties. These properties can enhance a real estate investor's returns because they can typically be acquired cheaply. Lenders don’t want to hold large inventories of REO properties, so they price them to sell.
This is a gross oversimplification of the foreclosure process. It’s critical to know the ins and outs of the legal process before considering this option.
How to buy REO homes or foreclosed properties
This is where foreclosed and REO properties differ the most. Foreclosed homes are first sold at auction -- conducted by either a county sheriff’s office or by trustees -- sight unseen. You typically can’t view the interior before purchase. This means there's an immense amount of risk involved and it’s not recommended for novices. What’s more, properties sold at auction require cash on hand at the auction. If you have the cash to do the deal already, great, but if you need financing for the purchase, you’ll need to have it lined up beforehand.
Buying an REO property, on the other hand, is more like buying a conventional home. These properties can sometimes be found on the multiple listing service (MLS). You get to inspect the property and negotiate terms of sale. There are lots of real estate agents that specialize in REO properties, so find one to guide you through the process.
There's also a third option: Buying directly from a property owner in pre-foreclosure. This involves negotiating directly with the borrower in default. The gist of it is you buy the property from the seller and assume their mortgage payments as well as any back payments due to the lender. This is a complex process that involves knowing the legal process and creative financing methods.
9. Real estate crowdfunding
Advantages of real estate crowdfunding:
- Access to commercial real estate previously available to only institutions and high-net-worth individuals
- Mostly for accredited investors, but some lower price point options are available for non-accredited investors
- Allows for passive ownership of a single property or a portfolio of properties
Few things have transformed investing more than the 2012 JOBS Act. This law let companies and real estate developers publicly solicit investors online. The crowdfunded real estate boom followed.
These new laws opened up the potential pool of investors for private deals like commercial real estate. According to industry group CFX Markets, the changes to crowdfunding rules expanded the pool of eligible investors from 8.5 million to the entire adult population. What’s more, investors can be solicited online. That means more potential investors can find out about these deals. It’s no surprise, then, that capital raised via equity crowdfunding grew 12-fold from 2012 to 2015.
There are many investment options available through crowdfunding platforms. You can choose where in the capital stack you want to invest -- the debt or equity portion of a property -- as well as how much you want to invest.
Most real estate deals on crowdfunding platforms are only available to accredited investors, and the minimum investment is typically in the tens of thousands of dollars. There are, however, some deals available to non-accredited investors, as well as eREITs -- private REITs built by platforms where investors can invest as little as $500.
How to invest in real estate crowdfunding platforms
There are dozens of platforms where you can invest in real estate crowdfunding deals, and the process for each is slightly different. The general process, though, is to sign up with a crowdfunding platform, research the various offerings, and be ready to make an offer when the platform opens the deal to potential investors. If the deal in question requires you to be an accredited investor, you'll need to submit financial statements to confirm that you're eligible.
Real estate crowdfunding deals can be owned in a self-directed IRA and other various tax-advantaged accounts, but there are some added complexities.
The crowdfunding process is relatively simple -- the challenge is picking a deal that fits your investment goals. You'll need to understand the terms of the deal as well as who's sponsoring it. One thing to keep in mind is that most deals on crowdfunding platforms require you to invest for multiple years, and pulling out early can incur massive fees and penalties.
10. Buy commercial real estate
This is where the big dogs in real estate like to run. By definition, commercial real estate (CRE) is any non-residential property such as office buildings, retail centers, hotels, and warehouses. Multifamily residential properties with five or more units are also considered commercial properties. It spans a wide variety of property types with their own business drivers and economic factors.
There's a reason that commercial property tends to be reserved for only the most experienced real estate investors: It requires significantly more experience in topics like
Advantages of investing in commercial real estate:
- zoning and building codes,
- legal documents, and
- unique rental contracts.
The capital required for a deal is much more than residential real estate, too.
It's for those reasons that beginners should partner with more experienced investors before venturing out on their own.
How to invest in commercial real estate
The process for purchasing commercial property is similar to buying residential property. The real difference comes in the level of complexity involved in each step of the process. Here’s a quick primer on how to invest in commercial real estate to get you started.
Which type of real estate investment is best for you?
To recap, here’s a table of the pros and cons of each investment category: