Real estate investing offers a number of ways to generate income, in addition to earning some of the best returns on investment available. For the first time investor it can be a bit intimidating as to where you start, so we wanted to give you a basic guide of places you can look to start investing in real estate. We go into a lot of these topics in more detail at our real estate investment site https://ryca.io/.
Most of the people reading this, have one or even two physician incomes available to them and with your primary income providing you with the funds to get started, investing in real estate can set you on a path to reducing hours at the hospital or even retiring early.
The way most would-be investors get started is to do a quick Google search of “real estate investing” and you’ll see dozens of options to invest in real estate. There are numerous ways to make money in real estate, but also to lose money. For the beginning real estate investor, the options can be overwhelming. Where do you start?
Let’s suppose you’ve diligently saved $50,000 through good planning and deleting your Amazon account. (Of course, you’ve already built your emergency fund and maxed out your tax-advantaged investments like a 401k or 403b.) Now you’re ready to take the first step into the world of real estate investing. What is the best way to start investing in real estate with $50,000?
Are you an active real estate investor or a passive investor
First, real estate beginners need to choose between active and passive investing. Let’s quickly highlight the difference between being an active real estate investor vs. passive investing.
Active investing means you are running the show. Everything depends on you. You make the decisions, like what properties to buy or sell, and how to renovate. This is a labor-intensive form of investing although it can be a lucrative way to earn money for those looking for income outside of medicine. Active investing is best for those who want to get their hands dirty and learn the nitty gritty details of real estate in order to maximize profits.
Passive investing, on the other hand, is a way to invest in real estate that does not require your daily participation. You make an investment, after doing your due diligence, then turn over all decision making to someone else. You get a regular pay out from the investment without any additional work after your initial research. Passive investing is best for those with money but little time, passion or expertise.
Our 4 Suggestions for Real Estate Investing
With our assumed budget of $50,000, there are four primary ways to get started investing in real estate:
- Joint venture with someone to buy a larger building.
- Buy and hold single family
A syndication is a pool of multiple investors together to purchase a larger piece of real estate than you could all afford alone. We’ve written a more detailed article about this at our investing site https://ryca.io In this type of investing, you provide the syndicator with your capital, and receive income payouts, either monthly or quarterly.
Real estate syndications are the ultimate in passive income, with you making the initial investment, and the syndicator doing the day-to-day work. Picture your real estate investments making money while you see patients, and someone else worries about a leaky sink.
The syndicator has the experience and know-how to vet all the potential tenants for you, arranging contractors as needed, and ensuring your investment is well managed. The syndicator will also find better deals than you can alone, thanks to their network of investors, brokers and agents. Finding a great off-market deal is a feat a beginner is unlikely to manage, without a significant commitment to networking.
An investment in a syndication is an illiquid investment, meaning once you invest your money, you are in it for the time specified in your original agreement. We talk a bit more about the different types of passive investments in our comparison article. The taxation of syndications can be complicated, but you do still benefit from the syndicators use of depreciation to lower your tax burden.
Joint Venture (JV) Real Estate Investing
Suppose you want to invest in something more ambitious than you can afford alone. You have $50,000 but have your eyes on a multi-family building. $50,000 won’t cut it if you are operating solo in most markets. In this scenario, you would partner with another real estate investor to buy a larger building. This is slightly similar to syndication in that you are pooling resources with someone, however it is far from hands off investing. A joint venture (JV) will require your active participation.
You and your partner lay out your responsibilities up front. You can share expertise and capital, allowing you to accomplish more faster than you would on your own, while benefiting from the economies of scale in a larger investment. This option creates a more stable cash flow than owning a single family home yourself or flipping, since you are able to collect rent from multiple units rather than a single home, while still enjoying the benefits of depreciation on your taxes.
Partner investing is time consuming though – but you share the load. You not only have to search for the best deal, secure financing, purchase the property and manage it, you also must collaborate with a partner on all of these aspects. Depending on both of your schedules, this can get tricky, especially if you are working with another physician. Your partner may not have the same goals as you, so hashing these out and setting them in stone before any money is spent is essential for a positive investing experience. Though no one really wants to consider it, there is always the potential risk that your partner may cheat you, or walk away from the deal, leaving you to clean up the mess alone. As in single family home investing, the mortgage may appear on your personal credit, as smaller multi-family residences usually require recourse loans that you must personally guarantee.
Fix and Flip
Flipping a house is a popular option, thanks to popular reality television shows, and there is the potential to reap a high return here as well. Flipping does not have the steady cash flows of a syndication, but may pay out larger amounts when you finally sell.
With flipping, you will have ultimate control. Every decision and responsibility falls to you. You will need to find the best option when searching for properties, arrange financing, purchase the property, personally guarantee the loan, plan the renovations, hire contractors or do the work yourself, and eventually hire a realtor to sell.
There is a huge time commitment and steep learning curve with flipping a house. You will need to have renovation skills and time, or the ability to source and manage reliable contractors. There are holding costs to consider, depending on how long the renovation lasts and how long it takes to sell. And timing is everything – the longer the flip takes, the more money you lose on interest and utilities. Of course, the market can go up or down while you’re renovating, so your projected profit is just that – a projection.
There is also a risk in flipping of losing more than you invest, if you uncover repairs that were not accounted for, and this happens pretty frequently so most flippers advise that you have a contingency budget of 20%. Even then, it is easy to go from a gain to a loss because you never know exactly what you will discover. Also, consider that your returns will be taxed as ordinary income and not capital gains if you own the real estate for less than 12 months.
Buy and Hold Single Family
With $50,000, you can easily find a single family home to purchase and rent. You may even be able to afford even 2 or 3 houses with $50,000 down. For those in a high cost of living area, like California or New York, a $50,000 down payment may seem absurd. In much of the United States however, the average home price is well under $150,000, so $50,000 goes a long way for a down payment. The Southwest and Midwest still have multiple markets where you can purchase a home in that price range and still meet the 1% rule of your rental income being 1% of the costs of the house.
Purchasing and renting a single family home generates cash flow, though it won’t always be steady. If you buy only one or two houses, when a tenant moves out, you will need a month to repaint, clean, and find new tenants. That is a month without rent but the mortgage still needs to get paid.
Buying and renting out a single family home can also be time-consuming. Similar to flipping, you make all decisions, not only will you need to find the right real estate deal, you still have to get the house ready for rent then find a tenant and handle repairs. You can hire a property manager to do this of course, but they will take anywhere from 8-10% of the rent.
There is also the risk that you will lose more than you invest if a tenant trashes the house or you incur a large capital expense such as needing to replace a roof or HVAC system. The mortgage you carry on the home will affect your personal credit as well. However, once you establish a larger portfolio of single family homes, the fluctuations in rental income due to vacancies smoothies out and you can negotiate lower management fees. This option has more favorable taxation than flipping though, thanks to depreciation. You’ll also have the benefit of the tenant creating equity for you, as they pay down the mortgage on the house each month.
So What Should You Choose?
Consider your lifestyle right now, as well as where you will be throughout your investment. What are your personal goals and responsibilities? Do you have enough time to maintain your friendships? How much attention can you spare from those areas of your life? These are important considerations before committing to any project, but especially the investment options that are more time intensive.
Investing in a syndication is best if you are looking for a steady cash flow from your investment and have a long (> 5 years) time horizon and can tolerate illiquidity. Syndications offer a real estate investment with a high return and almost no time commitment, after your initial due diligence. This makes them a stellar option for those who want to get into real estate, but don’t have the time or knowledge base needed. Because they are traditionally a lucrative investment and therefore desirable, most syndicators have a minimum investment: anywhere from $25,000 to over $250,000. $50,000 will allow you to participate in many syndications.
Joint Venture (JV) Real Estate Investing
JV investing is best for those who want to get a fast start in real estate investing and are ready to invest their time and capital with a partner to grow wealth with a trusted partner.
Fix and Flip
Flipping is best for those who want to dive into real estate investing head first – you’ll need around $50,000 for the down payment, renovations and a reserve for surprise expenses. However, if you can survive or even thrive on the the drama and stress, flipping can create an opportunity to grow your wealth quickly and supercharge your real estate portfolio. But it’s not for the faint of heart.
Buy and Hold Single Family
Buy and hold single family house are best for those who are willing to put in the time to learn a neighborhood well, have a long term time horizon and want and slow but steady way to grow wealth, while generating a moderate amount of cash flow.
To Wrap Up
As you can see, there are many options to expand your wealth and income with real estate investing. For most physicians, a hands off investment is the most practical option. Generating income from syndications, for example, would allow you to invest in real estate while eschewing the time commitments, liability, and wealth of knowledge needed to invest actively. Fixing and flipping a property would be more suited to someone looking for a part-time or flexible job. Although active investing can at times appear to be the fun, shiny option, or and one with the highest income potential, generating a solid, consistent income from a passive investment can be a great choice for busy physician families. If you would like to learn more about your investment options and how Ryca can help, schedule a call with us.
Rob Carroll is an active real estate investor and the co-found of Ryca.io, The site for investors to learn about passive income from real estate investments and syndications.