You’ve eaten in restaurants before, so how hard could it be to start one? Imagine opening a restaurant and trying to run it on a part-time basis, in the cracks of your schedule, not knowing anything about the business side of the industry, trying to run a profitable operation while learning by the school of hard knocks – hiring, firing, & managing employees, ordering & paying vendors, coordinating contractors, properly setting pricing, implementing technologies, marketing, book keeping, customer service, reading financial reports, etc. A few more things to pay attention to when running a business than you originally thought, huh?
Real estate is the same way. I’ve seen so many people get involved in real estate investing on a part-time basis and get their teeth kicked in because they had no idea what they were doing. Just because everyone lives in a house doesn’t mean everyone is equipped to run a profitable real estate investment business.
So how can you make money in real estate if you already have a job or a business that keeps you busy on a full-time basis? I own hundreds of rentals and I’ve been involved in thousands of transactions, playing every major role – buyer, seller, broker, lender, & borrower. Reflecting on what I know about real estate, I think the following 3 passive investment sources are the best ways to get involved in real estate on a part-time basis.
1. Primary Residence
The US tax law allows you to purchase a property, and as long as you live there for 2 of the past 5 years, you can sell the property and pay no capital gains taxes. That’s tax-free profits! There is a limit of $250k of gains for individuals and $500k of gains for married couples filing jointly. But think about that. You can buy a home, make some improvements while you live in it, turn around and sell it in two years, and put those profits in your pocket. Rinse and repeat!
I have a buddy in New Jersey who has done this every 2 years for the past 10 years. He buys a distressed home, fixes it up, and moves in for a couple years. He is usually buying & renovating for around $500k “all in”, and the After Repair Value (ARV) two years later is typically upwards of $700k-750k. He pockets $200k tax-free every two years! He’s done it 5 times! He now lives in a million dollar home that he owns free and clear! (Side note: Your spouse may flip out at the idea initially, so give them a few glasses of wine and then explain the logic behind the idea and the long-term wealth you will be able to build for your family.)
2. Real Estate Investment Trust
A REIT is an investment fund that offers stock for you to purchase. They pool funds from many investors at many different investment amounts. They then invest in different real estate asset classes. This is a good way to diversify across different types of properties (apartment buildings, commercial, vacant land, etc). REITs pay a return based on how well the overall fund performs. Make sure you do your due diligence on the REIT, the types of assets they invest in, how they’ve performed in the past, and what you can expect moving forward.
We are working on opening a REIT of our own in 2018 to invest in apartment buildings and vacation rentals. This way investors with smaller investment amounts (as low as $25k) can get involved in some of the amazing projects we are doing. Stay tuned on this!
3. Private Lending
Instead of learning a brand new business, why not just be the bank for someone who is already an expert in the industry? Think about every major city you’ve ever been to and the tallest buildings in those cities – they’re all banks! That tells me there’s serious money in banking. Finance is the industry that commands all other industries. You don’t need billions, you can lend $50k-100k. Maybe you have it in cash. You can also transition your IRA or 401K to a self-directed custodian like Equity Trust Company, and direct your investments yourself. You then lend your retirement funds to a real estate investor and earn a fixed return on your money, secured by a tangible asset (real estate). It’s not uncommon for real estate investors to pay 8% to 15% to private lenders in order to borrow their money for a deal. You want to make sure you’re lending 1) on a property at a price point that is less than the market value (plenty of equity built in, in case something goes wrong), 2) at a rate of return that justifies the “risk” you’re taking on the investment, and 3) to someone who has the fortitude and character to pay you back. There are some necessary documents to ensure your money is secured properly, just contact an attorney and they can help with that.
We utilize investment funds from private individuals to buy apartment buildings. We pay a preferred rate of return AND give a piece of equity in the project, so our investors can know exactly what they’re going to make on their money PLUS build long-term wealth. Reach out to me on the contact page of this site if you’d like to talk further on this.
I hope this helps to offer some insight on ways you can passively invest in real estate on a part-time basis. I strongly believe real estate will always be the most stable and predictable long-term investment you can put your money in. Even if you’re not a full-time investor, you can still capitalize on those returns and build long-term wealth by investing in the ways I’ve outlined above.
2 thoughts on “The Best 3 Ways to Invest in Real Estate on a Part-Time Basis”
Tim, great ideas. Using the primary residence works very well. Been doing it for years!
Good advise. A beginner/novice, like myself, needs information like this to consider.
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