In our last blog post, we described 4 different ways of investing in the real estate market. Now we will take a look at the differences among them.
First, let's clarify what do we mean Public vs. Private markets and Equity vs. Debt.
Public vs. Private
In the public market, you can buy publicly traded real estate related securities and derivatives. While in the private market, you strike deals with individual parties.
Equity vs. Debt
Equity refers to the fact that you own the real property, while debt means you are lending money to other investors who will own the real properties, and you will earn interests from your money.
Now, let's take a look at each of the 4 types of real estate investments based on the above combinations.
1. Own rental properties - Private Equity
You buy investment properties from the sellers and take ownership (equity) of such properties. Such transactions do not occur at the public security exchanges. When people talk about real estate investment, they typically refer to this type of investment, however, there are two sub-markets within this type of investment:
a. Own Your Own Rental Properties
If you do it right, or the luck favors you, you might have both positive cash flow each month and appreciated property value over time, even better, if you are use leverage (other people's money) rather than full cash for the investment, you could have substantial return.
However, many people overlook the downside of this investment - owning a rental property is like taking on a part-time job, don't underestimate the work, frustration, and addition investment you need to put in, as well as the middle night call from the tenant reporting the leaking pipe!
b. Invest in Private Equity Funds
There is another type of owning real estate through private market transactions - investing in Private Equity funds that invest in real estate markets. You have the benefit of owning but not managing the properties, also, by pooling many people's money together, the PE fund could diversify and find better deals than individual investors could find. Obviously you have to pay other people to do all the work for you!
2. Lend private mortgages - Private Debt
In this case, you are lending your money to other investors to enable them to purchase investment properties. You don't take ownership of the property, instead, you earn interest from other people's debts. There are quite a few ways to lend money to other people so you can profit from the real estate transactions. Below are two common ones:
a. Hard money lender
As a hard money lender, you lend your money to house flippers to enable them to achieve short term and quick profits. As a return, your profit will be handsome too - you will earn both upfront points as well as higher than normal interest rates. If the flipper fails, you will take title of the house and become the new owner!
b. Tax lien investor
You lend your money to county governments by helping them fill the tax holes created by residents who are delinquent on property taxes. Most counties require a minimum interest rate and time period for those people to pay you back, otherwise, you can take possession of the property! If you think this is a risk-free investment, it almost is!
In our next blog post, we will discuss the remaining 2 types of real estate investments.
First, let's clarify what do we mean Public vs. Private markets and Equity vs. Debt.
Public vs. Private
In the public market, you can buy publicly traded real estate related securities and derivatives. While in the private market, you strike deals with individual parties.
Equity vs. Debt
Equity refers to the fact that you own the real property, while debt means you are lending money to other investors who will own the real properties, and you will earn interests from your money.
Now, let's take a look at each of the 4 types of real estate investments based on the above combinations.
1. Own rental properties - Private Equity
You buy investment properties from the sellers and take ownership (equity) of such properties. Such transactions do not occur at the public security exchanges. When people talk about real estate investment, they typically refer to this type of investment, however, there are two sub-markets within this type of investment:
a. Own Your Own Rental Properties
If you do it right, or the luck favors you, you might have both positive cash flow each month and appreciated property value over time, even better, if you are use leverage (other people's money) rather than full cash for the investment, you could have substantial return.
However, many people overlook the downside of this investment - owning a rental property is like taking on a part-time job, don't underestimate the work, frustration, and addition investment you need to put in, as well as the middle night call from the tenant reporting the leaking pipe!
b. Invest in Private Equity Funds
There is another type of owning real estate through private market transactions - investing in Private Equity funds that invest in real estate markets. You have the benefit of owning but not managing the properties, also, by pooling many people's money together, the PE fund could diversify and find better deals than individual investors could find. Obviously you have to pay other people to do all the work for you!
2. Lend private mortgages - Private Debt
In this case, you are lending your money to other investors to enable them to purchase investment properties. You don't take ownership of the property, instead, you earn interest from other people's debts. There are quite a few ways to lend money to other people so you can profit from the real estate transactions. Below are two common ones:
a. Hard money lender
As a hard money lender, you lend your money to house flippers to enable them to achieve short term and quick profits. As a return, your profit will be handsome too - you will earn both upfront points as well as higher than normal interest rates. If the flipper fails, you will take title of the house and become the new owner!
b. Tax lien investor
You lend your money to county governments by helping them fill the tax holes created by residents who are delinquent on property taxes. Most counties require a minimum interest rate and time period for those people to pay you back, otherwise, you can take possession of the property! If you think this is a risk-free investment, it almost is!
In our next blog post, we will discuss the remaining 2 types of real estate investments.
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