Is Owning Property Really the Best Way to Make Money Investing in Real Estate?

by | BiggerPockets.com

It seems that many of us learn about the “American dream” of homeownership at a very early age, and for some, that dream can stick with us.

When I was working in real estate sales and as a contractor, my ultimate goal was to own a LOT of real estate. The more, the merrier!

Not to be a Scrooge, but now I’m now starting to question the premise that “owning more is better.” Is ownership really the only, or even the best, way to make money investing in real estate? Or are there better ways?

Related: When You Should and Shouldn’t Consider Rent-to-Own Investing

Control vs. Ownership

As I get older and hopefully wiser, I wonder if the best way to invest in real estate is always buying and holding properties, along with all the management and maintenance that comes with it. Or are there better ways to invest that are just as effective and efficient—with less risk? Is ownership really the dream we’re after—or is it more about control?

Today, I’m heading down the path of controlling more assets than I own, especially as I’m approaching my retirement years, and I’m always looking for better ways to simplify my life and my investing.

Here are some of ways you can mix up “pure” ownership with other ways of controlling deals.

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Trusts

Of course, some things make more sense to own outright, like shares of the business you run, but there are many things we can control without owning and still enjoy a lot of the benefits of without all the risks that could come along with ownership.

Take trusts, for example. Holding real estate inside a trust could be the perfect entity structure for an investor because “you” don’t own it (the trust does) and you’re not even the trustee or the beneficiary, yet you could still be the manager and control the bank accounts. In other words, the trust takes on the risks of ownership while you maintain the actual control over the assets owned by the trust.

As I’ve always said, “The best form of asset protection is not to own anything.”

Fractional Ownership

Another great way to invest in real estate without taking on too much risk is to only own part of the deal.

For example, you could have majority ownership (and control) but bring in a high income or high net worth partner to sign on the financing for your deal (e.g. apartments, mobile homes, student housing, etc.). So, why would they be willing to do that? Well, if you found the deal, ran the value-add renovations and were responsible for all the property management and maintenance, they may be more than happy to do their part by signing on the loan for a nice chunk of ownership with little to no work.

Another way that comes to mind is if you passively, usually for a preferred return with or without upside, invest in a company or fund that invests in real estate. Now, this can take many forms. Some fund investments have tax advantages (i.e. depreciation), like apartment funds, and some don’t have many tax advantages, like note, tax lien, or hard money funds.

Even being a private money lender is a great way to indirectly invest in real estate, without a ton of work or risk, for that matter.

Related: 10 Real Estate Markets Where The “Buy and Hold” Strategy Actually Made Sense

Control Without Ownership

Other than managing a trust, the next big way to have control of real estate without ownership is through options. For example, doing a sandwich lease option is the epitome of being able to capitalize on a deal you don’t even own.

Let’s say you find a property you can rent for $700 month with a $1,000 deposit for 3 to 5 years with the option to buy it for below asking price (i.e. sales price minus a commission, offering, say, $75,000 on an $80,000 asking price). Then you can turn around and sell it on a rent-to-own lease option to a buyer/tenant for, say, $950/month with a $3,000 deposit with the option to purchase in 2 to 3 years for $95,000.

Make the seller handle any repairs over $300 and the new tenant/ buyer fix anything up to $300, and you’d probably have a home run on your hands.

Downside of a deal like that? The worst-case scenario is that you’d return the property back to the seller at the end of the term.

Control With Ownership

That said, it is also possible to have control with ownership in a way where there is very little risk, and a perfect example of this is buying a property “subject to” the mortgage. Because the loan on the property that you take over is not in your name, your risk is very limited. Although the lender could call the loan, the biggest risk would be if you have a lot of money tied up in a renovation or if you couldn’t liquidate the property quickly enough. If you have enough reserves or access to capital, this may not be a problem.

Time to Get Creative!

The list of strategies for controlling (and benefitting from) real estate without owning it outright goes on.

So what are some of your favorite strategies for mitigating or limiting risk while investing in real estate? Are you dreaming of ownership—or control?

Be sure to comment below!

About Author

Dave Van Horn

Dave Van Horn is President at PPR The Note Co. – an operating entity that manages several funds that buy/sell/hold residential mortgages, both performing and delinquent. Dave has been in the Real Estate business for over 25 years, starting out as a Realtor and contractor and moving onto everything from fix and flips to Raising Private Money.

13 Comments

  1. Curt Smith

    Hi Dave, nice thought process. I was guessing upfront you where going to talk about the virtues of conferting owned properties into notes, or buying notes. LOL surprise, sandwitch lease options!

    – I Do do many of these, a few sandwich, mostly selling on an lease and option properties I own.
    – Some upsides but counter intuitively the upsides are best for experienced folks with deep researves. These deals sound good for new folks but there’s hickups in this deal that can saddle the investor with expenses and holding costs.
    – I’ve never delt with a seller who would lease to me, option the sale at the un-paid balance, AND be willing to cover >$300 of maintenance. To me this was prettier written and said than actually negotiated. But I know (Daves) steller reputation so I’m fully expecting to hear, Dave does this 100% of the time and sellers have no (initial) problem agreeing to the risk of intermittant maintenance costs possibly into the $1ks, to give up the certainty of managing the house and monthly mortgage payments. Nice trick if one can get it in writing AND then when the AC needs replacing actually getting a check out of a remote, financially distressed owner…
    – I just gave back an optioned deal back to the seller. It pained me royally that I was giving the owners a problem in their life. Rule #1 do no harm to sellers!! (or buyers). But because of me paying forward into my Karma piggy bank, I think a buyer has just just offered a contract that I forwarded to the owners, a military couple moved 2k miles away and I hope will be glad to be rid of this deal.

    So why did a successful option investor (me) give back a deal, and at a $2k-$5k loss? Well many leasons learned I’m happy to say we are quick learners when the tuition is in the $1ks. Margin between mortgage and rent was too low, about $100 at first then $250 after a rent raise and turn over. Never do these deals for less than $300 difference each month. The area was econ depressed, near a military base and it remains so 3+yrs later. I could not appreciate the deal into profit for a sale!!!! Even only paying 3% buyers side agent commission + covering closing I could NOT get this deal to close on a sale. Certainly NOT paying full 6% + closing costs as VA loans require. Don’t buy/option weak deals!!!! only nice houses, nice areas, good schools, NOT military town. Military is always dumping houses keeping prices depressed.
    – Would I continue to do sub-to, sell on lease and option, or sandwitch lease / option? Yes, but today after paying for some tuition on deal structure, my numbers will have to be MUCH more favorable. And account for me eating a new HVAC should I not be as smart or skilled as Dave to negotiate the seller to cover maint costs for me…

    But this post at BP is like a many…. I learned a Tony Robins lesson. Believe in yourself, be confident, ask for much HIGHER goals than I would think reasonable, be a good guy to the seller, and given Dave’s key tip ask the seller to continue to cover >$300 maintenance. Never know some sellers will agree. IMHO this is a game changer re the risk for new folks with low reserves to cover a roof or HVAC or even a $1k to swap a water heater on short notice.

    • Dave Van Horn

      Hi Curt,

      You are correct, there are many instances where you can stuck on deal especially with repairs. I paid the same tuition as you to find out! A strategy that I didn’t mention in the article with lease options is to utilize a home warranty. Now a property has to qualify for a home warranty (and there’s a cost to it, but it can billed into the deal) and it solves a lot of these issues.

      And I agree about not harming sellers or buyers. My lease options were normally not distressed owners through financial hardship, rather they were motivated (out of state owner, a tired investor, etc) to get rid of the property.

      Best,
      Dave

  2. James E. "Jim" Gorman IV on

    Thanks for this well written & thought provoking post. Does anyone reading this have any comments on
    how to get past the tradition Purchase and Sale RE agent bias of property owners with “top price
    expectations” and not an adequate realization of Taxes & Expenses involved in Purchase and Sale
    disposition of income property without an IRS 1031 Exchange or other procedure?

    • Andrew Hoelzel

      Agents do not care or understand, or both, about accurate pricing and the dynamics investors need to control. Their obligation is to the seller for highest and best, period. Having been a mortgage banker for 15 years, thank the lord I entered into the off-market space for purchasing r.e. How many loans have I written for investors who shunned my advice and instead went with their agent’s advice and literally bought homes for full tilt? Too many to admit. Now I can tell them why not to purchase the traditional way and how to get it done.

      • Greetings Andrew Hoelzel, . . . . . Thanks for your correct (spot on) observations.

        A couple of things that Agents always seem to fixate on is proforma projections (blue sky #’s) and grossly inadequate operating expenses; and they seem to never explain the impacts of taxes and expenses on sellers.

        Any suggestions on how to enter into the off-market space for purchasing RE your willing to share ?

        • Dave Van Horn

          Jim,

          I would suggest checking out Peter Conti and David Finkel’s book, “Buying Real Estate Without Cash or Credit.” It was a game changer for me. In it, they talk about how to find deals and motivated sellers.

          Best,
          Dave

  3. Danny Randazzo

    Dave,

    Great post, I love the mindset to think outside the box and generate income while limiting risk. Have you tried any of the above strategies? If so, how has that experience been? I typically control real estate with ownership.

    Thank You,
    Danny Randazzo

    • Dave Van Horn

      Hi Danny,

      Of course! It hasn’t been perfect but it’s a great low cash out of pocket way to acquire property. I’ve also sold properties on lease options and only about 1/4 of the people actually end up buying these places after all is said and done. I’m not sure why that is but it certainly makes for a better tenant since there’s still a pride of ownership, so they take better care of the property, make improvements, etc.

      Best,
      Dave

  4. Bernie Neyer

    I keep reading about investing in real estate and putting it on auto pilot, as if after buying it you don’t have to do much of anything. This simply is inaccurate. Even if you hire a manager you have to watch them AND the property.

    Hiring a manager is not a set and forget proposition. While you can change management, sometimes it is hard to extracate you from that management contract. On manager I was looking into had a contract that wouldn’t allow me to leave if a tenant they placed in the property was still there and then I could only leave on the anniversary of the contract, a once in a millinia alignment of the stars.

    If you truly want auto pilot real estate you should explore REITs. Your returns aren’t as great, but consistent year in and year out. The truth is though, most real estate Investors become some sort of lender eventually. The ROI is better than direct ownership and management time is extremely low. While there are risks, they are not as substantial as direct ownership.

    • Dave Van Horn

      Hi Bernie,

      I agree! And there’s a lot of ways to invest in real estate with varying degrees of management and headaches. It depends on the investor and their time availability, risk exposure, and desired return. REITs are one good example. So are notes. Storage garages are another. The good thing about Real Estate is it’s not limited to just rentals, the possibilities are really endless.

      Thanks for reading!
      Best,
      Dave

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