Newbie needs info on passive investing for the next 5 years

Tax Liens & Mortgage Notes
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Newbie needs info on passive investing for the next 5 years

Nachole Johnson
Sugar Land, TX · Member since 2015 · 6 posts · 2 votes

Hello all.

I've been a member of Bigger Pockets for a few months now but this is my first post. I have always been interested in real estate and now I believe it's time for me to actually set goals and milestones for myself. 

For reasons I don't have time to get into on the forum, I'd like to passively invest for at least the next 3-5 years before divulging in actual rental properties. I currently have 10k sitting in a Roth that I could invest now and plan on maxing out my contributions from here on out. I don't want to tap into my 401k just yet.  

From what I've been reading potential sources of passive income include investing in REIT's, buying notes, and crowd funding. I'm most interested in REIT's and notes in that order, but still don't quite get the concept of them based upon my research. I admit, it's getting clearer, but I still have a lot of questions. Please forgive my ignorance in advance.

REIT's

-If I purchase them within my Roth am I still subject to being able to only take out what I have originally invested and not the dividends I may receive on the REIT's? Meaning can I use the gains I made in REIT's for investing in rentals in the future?

-What should I look for in a company that holds my Roth? Currently I have my Roth through American Funds. From what I have read here people seem to like Vanguard. Is going with a company who does strictly investments like Vanguard or Fidelity better than regular bank IRAs like Wells Fargo and Capital One? I only ask this because I have bank accounts with both. 

-Can I actively trade REIT's? Meaning if I want to mix it up with retail, medical centers, student housing can I do that? Or do I even have a choice?

- Is their an advantage in investing in a mortgage REIT over a equity REIT?

-Is their an advantage of owing private REIT's over public REIT's or vice versa?

Notes

-Can this be done within an IRA with 10-20k? Or do I need to move the money into another account and save more?

-How do you obtain notes...I mean if someone has a mortgage that is about to default, how would you be able to come in an purchase it for under value?

-If someone does not pay the note, can you always automatically go into foreclosure mode and then essentially own the property in question?

-What happens when the note is paid in full by the homeowner? Is the transaction complete and the investor just walks away?

-Is there any good reason to be in 2nd position when buying notes?

Thanks in advance for the responses. I'm looking forward to learning from experienced investors. 

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Most Popular Reply

Bob Malecki
Investor · Kingston, WA · Member since 2008 · 1k+ posts · 1k+ votes
10y

Sorry, but I respectfully disagree on investing in mutual funds. They will eat up your earnings with management fees. A "tiny" 2% management fee can reduce your yield by over 60% over a 50 year period. The magic of compounding working against you. 

Check out "The Retirement Gamble" video that aired on PBS a few years ago, it may still be on Youtube. Here is an excerpt from the video: https://www.youtube.com/watch?v=KuZvu_h3x1A and related: https://www.youtube.com/watch?v=Lb5dlZM_XgM 

I started buying non performing loans in my Roth SDIRA a few years ago and we are seeing over 35% average annualized ROI on our portfolio. All tax free. I'm now starting a private equity fund to use my knowledge and platform to replicate this model for my investors.

Yes, buying and restructuring mortgage loans has a steep learning curve, but as I've found out, the return is worth the work! 

Bob

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  • Chris Martin
    Investor · Willow Spring, NC · Member since 2009 · 5k+ posts · 3k+ votes
    10y

    Welcome to BP. Lots of good questions.

    In general, whoever handles your IRA will provide a few choices of IRAs for you to invest in. As I'm sure you know, if you want to control your investment decisions (as in buying individual notes, houses, etc.) then you will need to 'direct' your investment... and that process is described as 'self directing' your IRA. Self directed IRAs (SDIRAs) are basically a different kind of IRA animal from those administered by investment managers like American Funds.

    So under 'Notes' where I see IRA in your post, if I substitute SDIRA then I would answer 'yes' because I've done it. In my case, I obtain notes as an originator of the note because I lend money to flippers. I do not have experience buying notes, but this can be achieved through an SDIRA. When the note is paid in full, the note holder files (records) a release (or cancelation or satisfaction, depending on your county) in public record and effectively 'just walks away' as you state.

    Personally, I see no good reason to ever be in 2nd position on a note. But I see no good reason to be in 1st position on a note I didn't create, because depending on where (what state) the note was originated and when, the security instrument may have serious issues of enforcability. Buying from investors who 'self made' (meaning not prepared by an attorney) notes where they sold a property on terms to an owner occupant buyer ... well, that's a space I'll leave to skilled players like @Dion DePaoli

    For REITs, a private REIT for me is very unattractive. See also https://www.biggerpockets.com/forums/520/topics/252556-fundrise-reit-ipo , which in addition I stay away from REITs with no management track record and no operating history. Final comment: not that you are thinking this, but Single Family REITs are not where I want to invest.

    0Reply
  • Nachole Johnson
    OP
    Sugar Land, TX · Member since 2015 · 6 posts · 2 votes
    10y

    Thank you for your detailed response Chris. Please forgive the typos I now see. (I wrote the post after a long day.)

    I can see why private REITs aren't the best choice from the previous post you linked. I'm interested in more of the commercial REITs based upon what I've been reading. I've made a few calls to investment firms today to see which would be the best to hold my Roth. 

    As far as notes are concerned, I'm still reading up on the process trying to learn. I see a ton of posts on notes, but not as much detail as I would like so I could learn. I plan on getting involved with my local REI group here, but based on what I see, they focus mainly on rental income strategies. I suppose that would be good for future reference and networking though.

    0Reply
  • Brian Serina
    Commercial Real Estate Broker · Sacramento, CA · Member since 2015 · 102 posts · 50 votes
    10y
    @Nachole Johnson:

    Not sure if this answers your question or not but here is a "if I were you" response to your reach-out. With $10k~$20k to invest and you want r/e exposure, keep it simple and go with a low cost mutual fund. Consider moving the IRA(s) into Vanguard and you will have all the exposure you want/need in R/E. I have a significant amount of $$ in their gnma fund VFIJX and also their reit VGSLX for my r/e exposure and you will get a nice mix of all of the r/e categories (office, hotels, shopping centers, health medical centers, etc). But as any investor knows, diversify. And then you can take weekends off, go on two week vacations and when your friends ask what do you do, you can answer you invest in office skyscrapers and shopping centers :)

    1Reply
  • Nachole Johnson
    OP
    Sugar Land, TX · Member since 2015 · 6 posts · 2 votes
    10y
    Originally posted by @Brian Serina:
    @Nachole Johnson:

    Not sure if this answers your question or not but here is a "if I were you" response to your reach-out. With $10k~$20k to invest and you want r/e exposure, keep it simple and go with a low cost mutual fund. Consider moving the IRA(s) into Vanguard and you will have all the exposure you want/need in R/E. I have a significant amount of $$ in their gnma fund VFIJX and also their reit VGSLX for my r/e exposure and you will get a nice mix of all of the r/e categories (office, hotels, shopping centers, health medical centers, etc). But as any investor knows, diversify. And then you can take weekends off, go on two week vacations and when your friends ask what do you do, you can answer you invest in office skyscrapers and shopping centers :)

     Thanks Brian. You're yet another person I've heard mention Vanguard. I'll look into them as  well. I'm getting excited for what 2016 will bring as far as me starting in real estate.

    0Reply
  • Bob Malecki
    Investor · Kingston, WA · Member since 2008 · 1k+ posts · 1k+ votes
    10y

    Sorry, but I respectfully disagree on investing in mutual funds. They will eat up your earnings with management fees. A "tiny" 2% management fee can reduce your yield by over 60% over a 50 year period. The magic of compounding working against you. 

    Check out "The Retirement Gamble" video that aired on PBS a few years ago, it may still be on Youtube. Here is an excerpt from the video: https://www.youtube.com/watch?v=KuZvu_h3x1A and related: https://www.youtube.com/watch?v=Lb5dlZM_XgM 

    I started buying non performing loans in my Roth SDIRA a few years ago and we are seeing over 35% average annualized ROI on our portfolio. All tax free. I'm now starting a private equity fund to use my knowledge and platform to replicate this model for my investors.

    Yes, buying and restructuring mortgage loans has a steep learning curve, but as I've found out, the return is worth the work! 

    Bob

    2Reply
  • Brian Serina
    Commercial Real Estate Broker · Sacramento, CA · Member since 2015 · 102 posts · 50 votes
    10y
    1Reply
  • Bob Malecki
    Investor · Kingston, WA · Member since 2008 · 1k+ posts · 1k+ votes
    10y

    Thanks for the clarification Brian. That makes better sense. As far as tolerance for risk, to each his/her own. As you can tell, I'm quite knowledgeable and comfortable with NPLs, especially considering the heightened inventory of distressed assets available to the secondary market from the 2008 housing bubble. 

    Bob

    1Reply
  • Account Closed
    Investor · Singapore · Member since 2013 · 1k+ posts · 3k+ votes
    10y

    Your options with such a small starting amount in passive REI are limited. Public REITS trade like stocks (example O) and give 3-5% yeilds. The good news is they are fully liquid like a stock. Bad news is relatively low returns and can be pretty volatile (I learned that the hard way riding that particular one up to doubling my investment and then right back to where it started).

    There are a whole slew of options if you are accredited and can invest at least 50-100K. These are tax lien funds, apartment syndications, Flip funds, commercial REITs etc etc all which can produce 10% plus returns. However, you give up significant liquidity and take on some risk. Another option is private lending but again, usually need more starting capital.

    0Reply
  • Nachole Johnson
    OP
    Sugar Land, TX · Member since 2015 · 6 posts · 2 votes
    10y

    I appreciate all of the dialogue. I'm absorbing it all. 

    @Account Closed I know my capital is limited, but that's all I have to work with at the time due to unexpected medical bills over the previous 2 years. You have to start somewhere, right? I'm great at saving, so that's why I have a 3-5 year goal to purchase my first rental, by that time I very well could have 50k to invest. 

    0Reply
  • Account Closed
    Investor · Singapore · Member since 2013 · 1k+ posts · 3k+ votes
    10y

    @Nachole Johnson By no means was I being critical of your starting investment. I was just commenting on the options for passive investing. But even with $50K to invest, being an accredited investor is another thing. I forgot to mention there are now offerings of syndications for smaller investments or also known as crowd funding. Thats something else to look into.

    0Reply
  • John Arendsen
    Homeowner · VISTA, CA · Member since 2015 · 726 posts · 340 votes
    10y

    I was also looking into REIT's as a possible investment but my E Trade advisor/consultant said you need to be very careful investing in them. You first need to determine if they are leveraged. Many of them speculate with your $$$ and can even over leverage which could cost you on ROI potential if not a loss. Additionally, not all REIT's are that liquid and easy to sell out of.

    0Reply
  • Brian Serina
    Commercial Real Estate Broker · Sacramento, CA · Member since 2015 · 102 posts · 50 votes
    10y
    Originally posted by @John Arendsen:

    I was also looking into REIT's as a possible investment but my E Trade advisor/consultant said you need to be very careful investing in them. You first need to determine if they are leveraged. Many of them speculate with your $$$ and can even over leverage which could cost you on ROI potential if not a loss. Additionally, not all REIT's are that liquid and easy to sell out of.

     You are quite right - reits are not all the same and some are very leveraged. If you stay with the big houses and invest direct, there typically is not a load fee (front or back) and you can liquidate that day.  Fees come into play if you buy say a VG reit via youf etrade a/c, it is very likely that your et a/c will treat it as a stock buy and charge you a fee.  Be careful of closed-end funds that trade on nyse since many are trading at a premium to their net asset value.

    0Reply
  • John Arendsen
    Homeowner · VISTA, CA · Member since 2015 · 726 posts · 340 votes
    10y

    @Brian SerinaThanks for the heads up. I have two E Trade accounts. One I manage and the only transaction fees I pay are $9.95 in and out. I'm more of a Warren Buffet type of buy and holder and don't do a lot of day trading, puts, shorts, longs, etc. 

    We have also just opened a family trust account that will be set up and managed as a discretionary account. However, I know the broker very well and he will not be moving us in and out of positions without discussing them with us first. 

    Plus we're starting out very modestly with him and not moving a large amount of funds into the account out of the gate. I do appreciate your taking the time to share this information with me, however.

    0Reply
  • Brian Serina
    Commercial Real Estate Broker · Sacramento, CA · Member since 2015 · 102 posts · 50 votes
    10y
    Originally posted by @John Arendsen:

    @Brian SerinaThanks for the heads up. I have two E Trade accounts. One I manage and the only transaction fees I pay are $9.95 in and out. I'm more of a Warren Buffet type of buy and holder and don't do a lot of day trading, puts, shorts, longs, etc. 

    We have also just opened a family trust account that will be set up and managed as a discretionary account. However, I know the broker very well and he will not be moving us in and out of positions without discussing them with us first. 

    Plus we're starting out very modestly with him and not moving a large amount of funds into the account out of the gate. I do appreciate your taking the time to share this information with me, however.

    imo, eTrade is pretty good, I use them.  Curious on what the broker thinks of r/e overall, rates and reits and ...oil stocks.  The oil majors have taken a beating last 12 months and in my humble opinion is where r/e stocks were in 2008~2012.

    0Reply
  • John Arendsen
    Homeowner · VISTA, CA · Member since 2015 · 726 posts · 340 votes
    10y

    @Brian Serina, no doubt about it, oil stocks took a beating during the last quarter of '15 . That stated I've got a contact who's a major player in the Global Oil industry. He's very successful and highly regarded in Canada and is currently in the process of doing some consolidating and syndicating of several oil fields which is about as close a description as I can offer up on an open thread like this. If you're interested in oil please feel free to PM me anytime and I will send you my email address and phone number.

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