Of course the most common way to invest in real estate is through the direct purchase of the properties. There are many strategies that can be employed. You buy and hold for the long term. This requires very active management and is very labour intensive, however, the long term growth can be worth the effort. You can also buy, fix and flip to generate a short term, sweat equity gain and reinvest the profits into your next venture. Good deals can be found at tax or foreclosure sales but these can be few and far between. Personally at this point, I prefer more passive ways to invest.
The second way you can invest in real estate is through REITs or Real Estate Investment Trusts. These are purchased like you would purchase a stock or mutual fund. Typically the results and returns can be favourable. REITs are large funds that invest in real estate and share the dividends and profits with the shareholders. The value of these funds can fluctuate just like the stock market. These funds are generally liquid, however, I have seen situations where the fears of investors have made a run on the cash available in the fund. When the cash is depleted the fund managers have the right to refuse any further redemption requests and investors may have to wait years until enough cash can be raised to meet the withdrawal demands.
The third way you could invest in real estate is through RELPs or Real Estate Limited Partnerships. These structures are usually organized with an experienced property manager or real estate development team acting as a general partner. You would provide the financing for the real estate project and receive a share of the ownership as a limited partner. You would have limited rights and influence in the operations of the partnership. A word of caution though, I have seen this area of the real estate business ripe with fraudulent activity. As with any investment you must do your own due diligence. The good news is you are only liable for the amount of your original capital investment.
Yet another way to get a piece of the real estate pie is by using MICs or Mortgage Investment Corporations. These vehicles allow you to invest in a pool of residential or other mortgages. The MIC would pay out 100% of its net income to shareholders as dividends. MICs typically underwrite higher risk mortgages and therefore usually generate a higher yield in return. Again due diligence would be prudent.
The fifth way one can invest in real estate is with syndicated mortgages. This is my personal favourite and is the main way I will be participating in the real estate market going forward. A syndicated mortgage is a mortgage instrument that is funded by several investors. This is not a pool or a fund, as the investor you are personally on title. Every investor has the full face value of their principal investment registered in their favour at the Provincial Land Registry Office with a charge on the land providing their collateral. The syndicated mortgage product that you invest in provides developers with the capital they need. This area of investment was typically only available to accredited investors or financial institutions. Recent changes to the market conditions and mortgage legislation now allows retail investors to participate in the lucrative area of project financing just like the banks do.Not all syndicated mortgages or mortgage brokers are created equal. These products can only be sold by mortgage brokers and you need to pick a broker that chooses projects and builders carefully. They must pay close attention to their own regulations and compliance. I have found a broker that I am very impressed with and would be happy to discuss their services with you if this passive way of investing in real estate interests you.
Written by: Steven D. Haney, May 31, 2015