Author Topic: Looking to deploy cash in real estate - mostly stupid noob  (Read 788 times)

HeadedWest2029

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Looking to deploy cash in real estate - mostly stupid noob
« on: February 28, 2018, 08:44:51 AM »
My father-in-law recently passed away and we'll be inheriting a non-trivial amount of money from this.  I've always been a stock market index guy (VTSAX), but my wife is interested in doing real estate because she thinks publicly traded companies are evil (and the socially responsible index has companies she doesn't like either).  We've debated on real estate in the past because the cash flow from rental income does present an attractive shortcut to cash flowing early retirement, but I'm not handy and I hate conflict so it would likely be handled by a property management team.  I do own farm land, but the soil doesn't talk back so managing that is pretty easy.

So I'm looking to tap the collective knowledge of folks here to get a lay of the land and filter down on plausible avenues of investment.  As I see it, we could look at the following:

1) Directly invest and manage the property - This one doesn't interest me at all.  I'm not handy, don't like conflict, is concentrated risk (eggs in one basket in terms of property and local economic conditions)

2) Directly invest, but outsource property management to a local firm - Obviously you lose a layer of profit in exchange for less work.  You still have concentrated risk, but I *might* be talked into it if I absolutely fell in love with a deal and a commercial real-estate NOT working as a dual agent confirmed it was a great deal.  But it would have to be REALLY convincing.  Even with property management, I don't relish the idea of increased tax complexity, establishing an LLC, finding a good attorney, lending partner, inspection expert, insurance and property management team.  However, one thing direct investment does have going for it is using a mortgage to increase potential returns (making add'l money on the lent money, or "cash on cash" returns being higher than a straight cash purchase...unless of course the market tanks and then you're underwater).  I've been looking at options on loopnet.  In general, our real estate scene is in decline, our state is losing population, so there is some depreciation risk on property value.  A lot of the apartment properties are in sketchy neighborhoods that tout higher cap rates (10-13%), whereas the nicer areas have cap rates around 7%.  A 13% cash on cash return is possible according to my real estate friend for this area.

3) Directly invest, but outsource property management to an online platform like HomeUnion - same as above, but we could access markets other than our area.  https://www.quora.com/Is-HomeUnion-better-than-investing-in-REITs.  Con: Asset Acquisition cost of 3.5% is a hefty up front cost

4) Invest from the lending side of things via Peer Street - I've done peer-to-peer lending on Prosper and will never do this again.  Website promised 7-10% returns and I've seen lots of defaults and they basically got caught lying about actual returns (ours have been ~3.6%)

5) Do a non-traded REIT like Fundrise. More diversification than a single holding (also, no control of investing in specific property), but still lots of management / middle-men fees (1% annual ongoing, 2% sales load).  Also, unlike publicly traded REITs, there is no SEC oversight, less liquidity to get your money out, less diversification compared to a REIT Index.  Honestly, this does an amazing job of explaining why this is a bad idea http://investingadvicewatchdog.com/non-traded-reits.html.   

6) Invest in publicly traded Vanguard REIT index - Completely passive, no crazy tax planning, financing, expensive and complex real estate team, and liquidity to sell if needed.  Con: we don't have any say in the underlying investments.  You basically own a share of all the REITs (which are regulated by SEC so their books are audited unlike private REITs).  BUT, if I'm not mistaken isn't the Vanguard REIT index already 3.71% of VTSAX?

7) Invest in more farm land.  Already a significant portion of our NW.  So probably a no

Thanks y'all

arach

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Re: Looking to deploy cash in real estate - mostly stupid noob
« Reply #1 on: March 01, 2018, 06:50:54 PM »
My first thought is why are you only selecting "one"?

It sounds to me like you aren't ready or prepared to directly invest, because if you were truly comfortable with it, you'd take the higher returns and ignore the rest.

That means I see you leaning towards turnkey or a REIT, or a quasi REIT like fundrise.

The only problem I see with REITs is if your wife will be comfortable with the investments there... You don't always have perfect visibility in who you are really funding.

So in short:
Do some more research. If you can't determine that directly investing and hiring a local management company that you trust, then don't do it... Get involved with some local groups to get to know the companies and others involved, and that will help your comfort.

Then it looks like you probably want to vet some REITs and invest there UNTIL your more comfortable with something else.

Thats me just interpreting what you are saying, for what its worth ;)

HeadedWest2029

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Re: Looking to deploy cash in real estate - mostly stupid noob
« Reply #2 on: March 02, 2018, 08:29:51 AM »
Thanks arach.  Yeah, didn't mean to imply only one of these is the answer, but it's true I am trying to narrow down / eliminate the worst ideas.  Right now I'm leaning towards meeting with some local property management teams and just see what options there are locally.  Does anyone have any experience with HomeUnion?  I kind of like the idea of spreading out the risk to some thriving areas to avoid home turf bias.  I'm just skeptical that the net returns after fees will justify the risk and illiquidity