It seems that many of us learn about the “American dream” of homeownership at a very early age, and for some, that dream can stick with us.
When I was working in real estate sales and as a contractor, my ultimate goal was to own a LOT of real estate. The more, the merrier!
Not to be a Scrooge, but now I’m now starting to question the premise that “owning more is better.” Is ownership really the only, or even the best, way to make money investing in real estate? Or are there better ways?
Control vs. Ownership
As I get older and hopefully wiser, I wonder if the best way to invest in real estate is always buying and holding properties, along with all the management and maintenance that comes with it. Or are there better ways to invest that are just as effective and efficient—with less risk? Is ownership really the dream we’re after—or is it more about control?
Today, I’m heading down the path of controlling more assets than I own, especially as I’m approaching my retirement years, and I’m always looking for better ways to simplify my life and my investing.
Here are some of ways you can mix up “pure” ownership with other ways of controlling deals.
Of course, some things make more sense to own outright, like shares of the business you run, but there are many things we can control without owning and still enjoy a lot of the benefits of without all the risks that could come along with ownership.
Take trusts, for example. Holding real estate inside a trust could be the perfect entity structure for an investor because “you” don’t own it (the trust does) and you’re not even the trustee or the beneficiary, yet you could still be the manager and control the bank accounts. In other words, the trust takes on the risks of ownership while you maintain the actual control over the assets owned by the trust.
As I’ve always said, “The best form of asset protection is not to own anything.”
Another great way to invest in real estate without taking on too much risk is to only own part of the deal.
For example, you could have majority ownership (and control) but bring in a high income or high net worth partner to sign on the financing for your deal (e.g. apartments, mobile homes, student housing, etc.). So, why would they be willing to do that? Well, if you found the deal, ran the value-add renovations and were responsible for all the property management and maintenance, they may be more than happy to do their part by signing on the loan for a nice chunk of ownership with little to no work.
Another way that comes to mind is if you passively, usually for a preferred return with or without upside, invest in a company or fund that invests in real estate. Now, this can take many forms. Some fund investments have tax advantages (i.e. depreciation), like apartment funds, and some don’t have many tax advantages, like note, tax lien, or hard money funds.
Even being a private money lender is a great way to indirectly invest in real estate, without a ton of work or risk, for that matter.
Control Without Ownership
Other than managing a trust, the next big way to have control of real estate without ownership is through options. For example, doing a sandwich lease option is the epitome of being able to capitalize on a deal you don’t even own.
Let’s say you find a property you can rent for $700 month with a $1,000 deposit for 3 to 5 years with the option to buy it for below asking price (i.e. sales price minus a commission, offering, say, $75,000 on an $80,000 asking price). Then you can turn around and sell it on a rent-to-own lease option to a buyer/tenant for, say, $950/month with a $3,000 deposit with the option to purchase in 2 to 3 years for $95,000.
Make the seller handle any repairs over $300 and the new tenant/ buyer fix anything up to $300, and you’d probably have a home run on your hands.
Downside of a deal like that? The worst-case scenario is that you’d return the property back to the seller at the end of the term.
Control With Ownership
That said, it is also possible to have control with ownership in a way where there is very little risk, and a perfect example of this is buying a property “subject to” the mortgage. Because the loan on the property that you take over is not in your name, your risk is very limited. Although the lender could call the loan, the biggest risk would be if you have a lot of money tied up in a renovation or if you couldn’t liquidate the property quickly enough. If you have enough reserves or access to capital, this may not be a problem.
Time to Get Creative!
The list of strategies for controlling (and benefitting from) real estate without owning it outright goes on.
So what are some of your favorite strategies for mitigating or limiting risk while investing in real estate? Are you dreaming of ownership—or control?
From Bigger Pockets