10 Brilliant Strategies For Creative Real Estate Investing
The following question may not seem like a question related to creative real estate investing. Personal finance, though, has a direct bearing on real estate investing. So, in a recent Real Estate Investing Abundance podcast cast interview with David Kamara, I asked the question,
“Why is it that so many people who are by most reasonable standards doing quite well, still terrified about the prospects of their financial futures?”
In response, he surprisingly answered. Fundamentally, that is how the world economies are set up.
The systems are set up to keep people continuously working.
Like me, David was a fulfilled professional passionate about his work. He was swept up in the excitement of the work and the challenge of career progression. If we are fortunate, we go to work, develop relationships, dedicate our lives and many hours to a particular mission that we believe in, and find fulfillment.
In many respects, we are fortunate to find ourselves in this enviable position.
Sadly, the majority of people are not so fortunate. Most people work and exchange their time and effort for money without any emotional or psychological reward.
Whether or not we find reward beyond the monetary, most people don’t stop to think about how the system is set up. We just plug into the system and keep exchanging our time and talent for money.
This leaves us vulnerable, terrified, and insecure.
If, for any reason, the working stops, even for a short time, the income stops. In short, without work, there is no income. Without revenue, there is no security.
David has put a considerable amount of thought into this dilemma. He developed a process that anyone can employ to set themselves free from the prevailing economic system of continuous work for income.
He calls the system the Personal Cash Flow Formula.
What is Creative Real Estate Investing?
The Personal Cash Flow Formula takes a broad-based approach to a personal analysis of an individual’s current financial situation. The analysis looks at a person’s current balance sheet and cash flow and focuses on three aspects of building wealth:
- Spend less than you make.
- Invest wisely.
- Generate passive income (income that doesn’t come from your time and labor).
There are many avenues for investing, but David discovered the most straightforward and most advantageous is creative real estate investing.
This may surprise many as passive income can only come from passive investing.
Most people are familiar with traditional forms of real estate investing. From this perspective, real estate investing is anything but passive.
Real estate investing is the avenue to wealth that the majority of self-made millionaires use to develop wealth.
So I asked David this question, “Why does the stock market remain the primary vehicle for investing?”
Just to clarify, David made his first million investing in stocks. This makes this a reasonable question for David because he later divested his stock interests and put it all into real estate investments.
As David pondered the question, several thoughts immerged. A primary reason seems to be education.
Most people do not know that they can own apartment properties.
When people think of real estate investing, they think of buying another house. This makes sense because people own their own residence, and they understand that aspect of owning real estate.
The problem is, renting your single-family house comes with dealing with tenants.
Not only are there tenants to deal with, but it also requires repair and maintenance. This isn’t a passive endeavor.
Creative real estate investing takes a non-traditional approach.
The solution is investing in real estate syndications.
Syndicators form pools of investors to allow individuals to invest in an apartment or other commercial real estate properties. Investing in real estate syndications is a profitable creative real estate investing strategy available to just about anyone.
Creative Real Estate Investing vs. Traditional Real Estate Investing
Any real estate investing book or course one picks up will deal with the traditional real estate investing strategies. The most popular methods are fix-and-flip, house hacking, and wholesaling. There is nothing wrong with these. I’ve done them myself. If one ever watches HGTV, there will be plenty of examples of people using these strategies.
Those using these strategies will be employing different types of creative financing. The standard methods are rent-to-own, owner financing, contract for deed, option to purchase, hard money lenders, short sale, preforeclosure, and various other means. All of these are viable options for acquiring real estate properties.
Though viable options, these traditional real estate investing strategies are NOT passive.
As HGTV often demonstrates, people are making money with these various strategies.
The problem is all of them require considerable time and effort for money.
These strategies are not generating a passive stream of income. Using these traditional strategies perpetuates the world economic systems. They keep people continuously working.
Creative real estate investing vs. traditional real estate investing helps us break free of the world economic systems designed to keep us working. Syndication in real estate investing is a passive avenue to financial freedom. Investing in real estate syndication is itself a passive endeavor. It also creates a passive stream of income that develops financial freedom.
Financial freedom provides time freedom to do what you want when you want to flourish abundantly.
10 Creative Real Estate Investing Strategies
No investment that leads to financial freedom is entirely passive. Busy people turn to the stock market because it appears to be one of the more passive investment avenues. This can be deceptive.
David made a million in the stock market. Making the million was anything but passive. For David, it was time-consuming and complicated.
David spent hours tediously researching the markets and analyzing companies. Beyond time-consuming, the constant market fluctuations were nerve-racking. The unpredictable volatility presents risk challenges that are difficult to manage.
For these reasons, David searched for an alternative and discovered real estate syndication. At first glance, this seems daunting and overwhelming.
However, David discovered that syndication in real estate as an investment vehicle is more straightforward and less complex than trading in the stock market. A big plus is that real estate is a tangible asset.
Strategy One: Syndication Sponsors
While pondering the question as to why more people do not invest in real estate, David also reflected on the issue of trust. Investing in real estate syndications requires the passive investor to turn their hard-earned money over to a syndicator. Once the funds are turned over to the syndicator, the passive investor has little to no control. The same is true for a stock investment too, but stocks are liquid.
You can buy a stock, and two minutes later, turn around and sell. Real estate is non-liquid. Once the funds are invested in a real estate syndication, those funds will be tied up for at least three to possibly ten years.
Investing in a real estate syndication requires a high level of trust.
The first strategy the investor needs to employ is finding a syndicator they can trust. This is not only the most crucial step; it is probably the most challenging.
Various kinds of real estate meet-ups can be found in most communities. There are real estate investment clubs or associations that conduct regular meetings and hold educational events.
Some meet-ups are just that. They are not an organized club but just a group of people who meet regularly to network and discuss real estate investment opportunities. The organization can be found via an internet search, and many of them are now meeting online.
Podcasts are an excellent source for getting to know syndicators.
Tune into Real Estate Investing Abundance. There you’ll get to see the host and the many guests who appear on the show.
Strategy Two: Real Estate Basics
Once the significant hurdle of finding the syndicator is accomplished, the investment process is simplified. Through my life experience, I’ve discovered that blind trust often leads to disappointment.
A passive investor in real estate syndication needs to develop at least an elementary level of investing sophistication.
A trustworthy syndicator is priceless. Self-knowledge is even more valuable.
For a basic primer in real estate syndication, refer to the article, How to Build Wealth with Syndicated Multi-family Real Estate Investing.
First, know the sector. The general sectors are office, industrial, retail, hospitality, self-storage, mobile home parks, land, and specialty such as parking lots, airports, stadiums, hospitals, marinas, etc. Before investing, gather a basic understanding of the sector.
- How does the sector perform over time?
- How has it performed through economic downturns?
Class is another aspect to understand. In real estate syndication investing, there are primarily three classes, A, B, and C.
- Class A is a top-tier property in the most desirable locations. These properties attract executive-level tenants.
- Class B properties are mid-level properties in good locations and attract the median income white-collar worker.
- Class C properties are the least desirable and often in need of significant renovations. They are generally built before 1980.
Markets are a critical factor. The three factors of most significance are job growth, income growth, and population growth. Markets make a difference. It will be a challenge, if not impossible, to generate a profit in a declining market.
The well-worn saying, “A rising tide raises all ships,” is an adage worth remembering when evaluating markets.
For further information about markets, reference the article, 10 Best Places in the US to Strategically Invest in Real Estate in 2021.
Strategy Three: Performance Indicators
There are three primary performance indicators of concern as a passive investor:
- Internal Rate of Return (IRR)
- Cash-on-Cash Return (CoC)
- Equity Multiple
For further definitions of each, see Steed Talker Capital FAQ.
Which one is most important will be determined by whether the investment is for capital growth or passive cash flow. The IRR is the most critical consideration for growth investing.
For regular passive income payments, CoC will be the most significant.
Strategy Four: Debt Structures
The word debt scares a lot of people. Debt, though, is the lifeblood of real estate syndication. It is the aspect of syndication that provides the desirable advantage of leverage. With an appropriate ratio of debt to equity, it is considered valuable.
Strategy Five: Investment Structures
All real estate syndications have an established business structure. Most commonly, limited liability companies (LLCs) form the basic structure. The LLC holds the title to the property, and the investors invest in the LLC. The organizational structure will vary from syndication to syndication. Often they are just one LLC that holds the title and the investors. These structures, though, can get pretty complex. An organizational chart will explain the relationships.
Strategy Six: Underwriting and Projections
The underwriting is the analysis of the profitability of the proposed property purchase. The underwriting will review rent rolls and analyze the profit and loss statement for at least 12 months. The profit projections are derived from this analysis. One does not need to be an accountant to understand the underwriting and projections.
To reduce anxiety and reliance on blind trust, a basic understanding of underwriting is beneficial.
Strategy Seven: Waterfalls
In the jargon of real estate syndication investing, waterfall refers to the division of profits. In its simplest form, a fix-and-flipper, the division might be 50/50 split. The fix-and-flipper doing the work gets 50% for their time and effort. The investor who purchased the property and supplied the capital for the improvements receives the other 50%.
In commercial real estate syndication, the split becomes a bit more complex. Often the syndicator receives 30%, and the investor stack receives 70%. The splits can become much more complicated with preferred investor status. The splits can be further complicated when target-based.
When a particular performance target is reached, the splits can be adjusted.
Strategy Eight: Making the Investment
There are three essential documents to the passive investor investing in syndications:
- Private placement memorandum (PPM)
- Operating Agreement
- Subscription Agreement
The PPM is the disclosure document. It describes every possible reason why you should not be making this investment.
The operating agreement details the organizational structure and how the operation is to function. It depicts the duties and responsibilities of the officers.
The projected target timelines are outlined. The classes of investors and the projected disbursements are defined.
The subscription agreement is the document signed by the investor stating they agree to the terms and conditions specified in the operating agreement.
These three documents are the most significant for the passive investor.
At first glance, they are intimidating. After reviewing a few, they become routine.
The gotcha statements are where the passive investor will look first. Capital calls are a gotcha to look out for. A capital call is a request by the sponsor requesting an additional capital contribution.
Watch to be sure this is not a mandate. If it is a mandate, the investor should plan for this and be sure they have the capital in reserves to contribute in the event of a call. It might be best to just pass on an offering that includes a mandatory capital call.
For further information on PPMs, Operating agreements, and Subscription agreements, see the article, How to Get Started with Passive Real Estate Investing
Strategy Nine: During the Investment
The strategy of most significant importance during the investment is to learn to sit back and enjoy.
Unlike an investment in stocks, capital preservation and investment profit or loss do not fluctuate by the minute.
Real estate syndication investments move slowly and much more predictably.
A good sponsor provides good communication regularly.
The reporting, often monthly, provides progress reports. It reports where the project is regarding targets detailed in the operating agreement.
Best of all, for the cash flowing property distributions begin. Most commonly, distributions are made quarterly, but some sponsors provide them monthly. The amount of the distribution will depend on the amount of cash on hand. The percentage will be as prescribed in the operating agreement.
There are tax implications. Each investor will be provided a Schedule K-1 (Form 1065), Partner’s Share of Income, Deductions, and Credits. Stock market investors accustomed to receiving Form 1099 dread April 15. Unlike stock market investors, most real estate syndication investors look forward to April 15.
Depreciation allows real estate syndication investors to legally write off substantial losses on April 15 when in actuality, significant profits have been made.
Strategy Ten: After the Investment
The strategy to master after the investment is to learn to enjoy and appreciate a good reward.
Suppose the investment has been worked out as projected. In that case, the final payment will reflect the projection outlined in the operating agreement.
On the sale or refinance of the property, the syndicator returns the capital to the investor.
Above the return of capital is whatever profit the syndication developed. This is where the IRR comes into play. After all, expenses are paid, the final distributions of profits are distributed.
A 14% to 20% or more IRR is not unusual.
Applying these 10 creative real estate investing strategies via passive real estate syndication investing will provide a passive income stream. As the passive stream of income grows, financial freedom follows. Financial independence provides time freedom.
With financial and time freedom, the busy, passionate, and fulfilled professional can continue the work of their calling. With financial freedom, passionate professionals can pursue their calling without the stress of paying the bills and putting food on the table. This freedom allows the professional more time to contribute to their calling more creatively and with more energy.
With financial and time freedom, the fulfilled professional can discover more ways to contribute their time and effort to create a world of abundance for all beings.
Creatively investing in real estate syndication is frightening. Overcoming the fright requires the building of a trustworthy relationship. To begin building a trusting relationship, schedule a FREE 30-minute call.
Your initial call will begin the trust-building. Initially, that is all it will be. There is no hard sale.
There will not even be a presentation of a syndication offering. Even if you want to invest, an offering will not be made available. We will just get to know one another and talk about your investing aspirations. Mostly, I’ll listen. If you have questions, I’ll happily answer.
If you prefer email, send me a note with your thoughts, questions, and concerns to firstname.lastname@example.org
About the Author – Dr. Allen Lomax
With careers in academia, podcasting, and real estate investing, Dr. Allen Lomax inspires us to break open our minds’ secrets to success. Through passive real estate investments, he helps engaged professionals create time freedom to live abundantly in all life’s areas.