How Should/Could my friend invest in RE?

Question

So I get questions from people from time to time asking me about how they can invest in real estate? I live in CA and so do most of my friends that ask me about this and I'm not sure what to tell them.

I bought a condo in San Diego at the bottom of the market, no cost refi'd twice and now rent it out for $300/month cash on cash return. There's nothing like that available where my friends and I live now in SoCal - LA, OC, SD, SF, etc so should I tell them to look for SFH's or 2-4 unit properties in other states?

Personally, I'm looking at investment opportunities in other states but I know a lot of my friends who are doctors, lawyers, etc don't have the time/interest to do that. They are basically looking for someone to give their money to and make money off real estate?

Now I know these people exist but how do you find someone like that that's good at what they do and also trustworthy? I'm sure there are plenty of people willing to take 50-100k off your hands :)

I think most of my friends also want to invest in something relatively local since they aren't big time RE dealers or anything like that. They're probably more comfortable being able to drive by the property once in a while knowing that they own a piece of it even if they don't have to do any work for it.

So what would you tell someone like this?

Jean Bolger · Answer

I will chime in with the idea that the only people who "should" be investing in real estate are people who are actually actively interested in real estate. I know a lot of people who hear a little bit about what I've done and say, "wow, that sounds cool, I wish I knew how to do that". But it stops there. None of them have actually proceeded to learning more, even though I encourage them to check out the info here on BP and am more than happy to talk about it with them all day.
There are no easy index funds in real estate. There's no one fool-proof method, and there are all kinds of ways to screw up, so it does take research.

This sounds a little grumpier than my usual posts, I realize. I guess I'm actually kind of bummed that none of those friends I was talking about has gotten fired up and pursued learning more about REI!

Dawn Anastasi · Answer

I would think that if they're looking to be completely hands off, that means not owning property themselves. Because if they do, they typically have to manage the manager and if they get a bad PM, it can cause them headaches and such.

On the flip side (flip, get it, real estate joke) if you lend money out, you really have to trust that you will get paid back. Someone has to have a track record, and you need expectation on what that person will do.

People have no qualms about putting tens or hundreds of thousands of dollars in an account at a company like T. Rowe price, and having strangers who they've never met make decisions on investing their money, but it's a lot more scary to invest in actual individuals. (Even if they could make more money doing so.)

Darrin Carey · Answer

I'd clarify first what you mean by "invest.....with someone". To me that implies a long term partnership or joint venture of some type. I'd be very cautious with that. Expectations or circumstances can change, putting partners at odds with each other. Even when both had the best intentions and similar expectations at the start.

On the other hand buying a property and being the sole owner is not the same issue long term. And it's the same due diligence whether the property local or not.

Dayton, Ohio has a large number of out of state and out of country investors because of the cashflow. Those who do their due diligence, and put a good team on the ground do well. Those who don't, well....

Darrin Carey · Answer

@Harry Campbell The hardest question is "Who do you trust?" Trust is built over time. I know I am trustworthy, but you don't know me, and should not assume I am.

Referrals will help, and so will doing your own due diligence about deals. I sold a property to a new landlord last month. He was going to skip the Inspection, but i encouraged him to get one. (cost me $906 to make a repair a flashing leak). It was the right thing to do, and I hope he comes back for another property.

I just posted a property for sale in the forum. http://www.biggerpockets.com/forums/517/topics/124641-updated-single-family-rental--dayton-ohio

You should not believe anything listed except the price. I said the rent is $700. You should talk to a local Prop Manager or 3 and get their opinion. I might be high, I might be low. If they say the rent is $450, then I'm just lying. You should get answers from $675 to $750.

I also said the property taxes are $119 per month. You can check the Auditor to verify. Insurance at $34 per month. Get a quote, or ask for mine.

If you find someone whose initial information is good, you've found someone you may be able to work with.

Local in SoCal is harder. I lived out there, and it was a struggle to try to find numbers that work. Rehabbing was better, but that's time intensive.

For cashflow, it seems like the midwest is the place to be. To invest out of the area requires some time to build a team you can trust.

So it's a question of comfort with the trade-off. Lower return, but local comfort, or a higher return on a non-local investment.

Either answer is right, it's just a question of which is right for you and your friends.

Harry Campbell · Answer

@Brian Daly Gotcha, wasn't aware of these types of companies but they may be something I need to look into. I guess it'd be tough to figure out how good a company is b/c there aren't benchmarks to compare performance to(is there?). For ex, with stock investing, I can look and see that 80% of passive funds underperform actively managed funds due to fees/expenses over long periods of time. But I can't do the same thing really with RE. I try to invest based off math and risk instead of what other people tell me is a good idea :)

@Darrin Carey I don't have the $$ to have a team start working for me but this may be something I consider in the future. I actually like building businesses(working on my online empire right now :) ) and seems like hiring a prop manager and wholesaler/agent would be a good starting point. Are there any books/resources(preferably free or inexpensive) that you'd recommend for researching more about these types of setups?

@Michael Lauther Appreciate your responses. And I think there lies the Catch 22 of investing in general. The people who are willing to research/understand their investments are generally the ones who see it's easier to do it themselves or take a more active role.

The ones looking to just drop their money in something they don't understand(whether stocks, re, etc) are the ones who shouldn't be doing that and may ultimately get burned.

Michael Lauther · Answer

@Harry Campbell

" I'd disagree that you need to attend to every investment. I come from an investment background and there are extremely cheap (ER's in .2% or less range) target date retirement funds that you can invest your money in and you will outperform a majority of financial advisors. That is a fact supported by countless studies"

Harry I would say the research you just quoted would qualify for attending to investments. Every investment needs to be understood and there is always a trade off between risk and reward. I appreciate that you are experienced and can recommend stock or bond investments but I would suggest that those investing with you should have done their due diligence regarding your qualifications as well as understand the investment's you are recommending.

Understanding what to recommend when it comes to real estate is not so different than recommending financial instruments. It all starts with the clients goals, risk tolerance, and time frame. Once you know this the area in real estate to consider will be clearer.

Darrin Carey · Answer

@Harry Campbell Building a basic team for someone who is working full-time is much simpler than someone who is going at real estate full-time.

At a very basic level, you really need two key people. The first is a good Property Manager. They should know the good inspectors, contractors, etc.

I'm in Dayton Ohio, and here, the good Property Managers will walk-through a potential property for their clients. The can give their opinion if the price and condition are reasonable, and a ballpark of what the repairs may cost. Ohio Property Managers are required to be licensed agents, so they can help from that aspect too. However, the top Property Managers focus on property management, not sales.

The second person to add to your team would be a good wholesaler or Turn-key real estate provider, or a real estate agent if you are sticking with the MLS. The Property Manager becomes the check on what they are offering and telling you.

With just two people, you can build an impressive rental portfolio and still have a full-time job.

That assumes you want to own the property directly. If you want to be the lender, it's a little different.

I have private lenders who lend funds to me for various real estate deals. Those relationships were built entirely on trust and personal recommendations.

I'd get references from people who have loaned money to the person, and other business relationships that exist. Someone who constantly slow pays vendors or lenders is not someone I would loan money to. Even with a mortgage on the property. Fortunately, the work is front loaded. A bunch of work the first time, then just a little for each additional deal.

Brian Daly · Answer

@Harry Campbell - I am not referring to REITs, rather working directly with smaller privately owned investment companies in the area. For example, you mentioned you were in the OC. The Norris Group is a VERY reputable company in that general area that (assuming they are still taking investors) can manage the trust deed investments and provide a decent return. There are plenty of companies (including my own) that deal directly with private individuals and set them up with trust deed investments at slightly higher returns on flip properties (or long term rentals - rates are lower though). And then there are investment funds that pool funds together in small LLCs to buy multiple "flip" properties or larger commercial buildings. Long story short - there are plenty of great people in this market that can "manage" their money within real estate.

Harry Campbell · Answer

I'd disagree that you need to attend to every investment. I come from an investment background and there are extremely cheap (ER's in .2% or less range) target date retirement funds that you can invest your money in and you will outperform a majority of financial advisors. That is a fact supported by countless studies.

I know exactly what to recommend to newbie investors when it comes to stocks/bonds - keep it simple, contribute a lot and keep costs down. Not sure why everyone is talking about risk - I'm not looking for riskless investments.

But when it comes to RE, I'm struggling to figure out what to recommend. There are people like me who are willing to get their hands dirty a bit but how can most people with a day job who are relatively young put their money into investment property?

I saw someone mention building a team but you have to remember people like me and my friends do not do RE full time. We don't want to build a team(whatever this even means) in another state - that's almost like another full time job.

@Brian Daly I've looked a little bit into REITS and things like that. Might need to do some more research into what you're describing. But I don't think the returns are nearly as high as other RE investments that most people on this forum are doing.

Brian Daly · Answer

Hi Harry,

Sounds like they may better suited for investing in trust deeds (assuming that's in their comfort zone). Plenty of reputable lenders and investors here in SD (SoCal) that can do most/all of the work. There are also a few companies that have investment funds set up that will funds together to buy into bigger projects. I'd be glad to share if this is a direction they would consider going.

@Darrin Carey hit it on the head - all comes down to who you can trust.

Brian

How Should/Could my friend invest in RE?

How Should/Could my friend invest in RE?

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