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Posted over 13 years ago

High Yield (Passive) Real Estate Investments

Many investors are turned off by real estate because they do not have the time or inclination to become landlords and property managers. If the investor is a rehabber or wholesaler, real estate becomes more of a business rather than an investment. Many successful real estate “investors” are actually real estate “operators” in the real estate business. Fortunately, there are ways for passive investors to enjoy many of the secure and inflation proof benefits of real estate investing without the hassle.    Perhaps you, like I, want to capture the high yields and potential capital appreciation of investing in real estate, but don’t want the management hassles and time commitment involved in active property ownership. Maybe you have a full time job or business, or perhaps you’re retired looking for greater income than bank CDs and greater security than a volatile stock market. Or perhaps like me, having owned income producing property for many years, you’re tired of “tenants and toilets”. If so, consider passive real estate investments, i.e., investing in real estate securities.                 Types of Passive Real Estate Investments                  REITsReal Estate Investment Trusts are companies that own, manage and operate income producing real estate. They are organized so that the income produced is taxed only once, at the investor level. By law, REITs must pay at least 90% of their net income as dividends to their shareholders. Hence REITs are high yield vehicles that also offer a chance for capital appreciation. There are currently about 180 publicly traded REITs whose shares are listed on the NYSE, ASE or NASDAQ. REITS specialize by property type (apartments, office buildings, malls, warehouses, hotels, etc.) and by region. Investors can expect dividend yields in the 5-9 % range, ownership in high quality real property, professional management, and a decent chance for long term capital appreciation. Real Estate Mutual FundsThere are over 100 Real Estate Mutual Funds. Most invest in a select portfolio of REITs. Others invest in both REITs and other publicly traded companies involved in real estate ownership and real estate development. Real estate mutual funds offer diversification, professional management and high dividend yields. Unfortunately, the investor ends up paying two levels of management fees and expenses; one set of fees to the REIT management and an additional management fee of 1-2% to the manager of the mutual fund. Real Estate Limited PartnershipsLimited Partnerships are a way to invest in real estate, without incurring a liability beyond the amount of your investment. However, an investor is still able to enjoy the benefits of appreciation and tax deductions for the total value of the property. LPs can be used by landlords and developers to buy, build or rehabilitate rental housing projects using other peoples money. Because of the high degree of risk involved, investors in Real Estate Limited Partnerships expect to earn 15% + annually on their invested capital. Real Estate Limited Partnerships allow centralization of management, through the general partner. They allow sponsors/developers to maintain control of their projects while raising new equity. The terms of the partnership agreement, governing the on-going relationship, are set jointly by the general and limited partner(s). Once the partnership is established, the general partner makes all day to day operating decisions. Limited partner(s) may only take drastic action if the general partner defaults on the terms of the partnership agreement or is grossly negligent, events that can lead to removal of the general partner. The LPs come in all shapes and sizes, some are public funds with thousands of limited partners, others are private funds with as few as 3 or 4 friends investing $25,000 each. Triple Net Leased PropertyA triple-net lease property is an investment where one owns real estate (land and building). Leases to a tenant for a 15-25 year term, who agrees to occupy the property, operate their business on the premises, pay rent and all the property operating expenses (taxes, maintenance, and insurance) with the opportunity for rent to increase over time as a hedge against inflation. Unlike owning duplexes, apartments, land, or an office building, owning a commercial property under a triple-net lease agreement to a business tenant is a passive investment (management and headache-free). In most real estate investments such as mini-storage facilities, apartments, and office buildings you as the property owner must perform property management duties, and pay operating expenses. You rent the property, collect the rents, refurbish the premises, pay the property taxes, insurance premiums, maintenance, accounting, legal, and other operating expenses. Whereas, under a triple-net lease arrangement the tenant agrees to perform all these functions for you as the owner of the property in return for a long-term lease agreement. With a passive real estate investment, such as owning commercial property under a triple-net lease arrangement, the tenant operates its business in the location. As the owner of the property, you do not have to contend with monthly renters and operating expenses. Further, these types of commercial tenants are positive business renters. Unlike apartment renters who tend to abuse the property and then move out leaving the owner to refurbish and find new renters, commercial tenants have a vested business interest in seeing that a location is well maintained and attractive to customers. As a result, there is an economic incentive to enhance the owner's property over time. High Yield Private Mortgage Notes and Trust DeedsThese notes are fully secured by income producing real estate, and the loan proceeds are used by the borrower for the acquisition, rehabilitation or equity cash out of residential and commercial properties. Investors have the opportunity to obtain above market returns of 12 - 15% in first trust deed position. These loans are usually for duration of one year and provide a monthly income with interest only payments. Private Mortgage Notes usually do not exceed 60% of the current appraised property value. Private Mortgage Brokers originate these loans, and are able to obtain these high yields because of the unique advantages these loans offer to the professional real estate investor. They are able to close most loans in 2 weeks or less whereas institutional lenders require 6 weeks or more to close and fund a commercial mortgage loan. Further these loans are asset based; the real property itself is the basis of the lending decision. Hence, if the property is producing sufficient income to pay the note interest and the value of the property will fully secure the note and provide sufficient equity, then borrower credit is not an issue. Instead of concentrating on minute detail of the borrower’s credit history as institutional lenders do, private mortgage note holders concentrate their due diligence efforts on the real estate securing the loan. They provide a borrower with the ability to borrow on underwriting criteria not available through institutional lenders, hence investors in private mortgage notes are able to receive much higher yields with no increased risk.   Don Konipol invests his own money and his clients’ money in high yield private mortgage notes through the Managed Mortgage Investment Fund LP of which he is the general partner.  He can be reached at 832-577-8838 or emailed at [email protected] or visit the Managed Mortgage Investment Fund web siteprivatemortgagefinancing.com.

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