What are the best real estate investments out there? Now, this is a big topic, and there’s no way to cover it in just one article, even though I feel I have the credentials to do it (credentials = lots of gains and lots of losses).
You see, I have a podcast, and on this show we interview successful investors, entrepreneurs, and executives who have made some big mistakes along the way. And I think we could all admit that it could have been any of us in their shoes.
I know that I’ve made my share of mistakes, like the time I built a waterfront investment home that I should have made a quick $80k on—but I lost $40k instead. (That scroungy little guy swore he was a drywall expert!)
Or the doublewide in the DC suburb that I took in trade for a home I flipped. It was in the path of progress when I bought it. But two very bad tenants later, it was in the path of a semi-truck that came to haul it away.
Or the beautiful Hyatt hotel I built with a partner in a hot city that was just blowing up. It blew up alright, but not in the way we expected.
All seriousness aside, I’ve made a few mistakes in real estate. But I’ve made a whole lot more money than I’ve lost. And I’ve had a lot of fun on this journey.
I’ve been involved in many aspects of residential and commercial real estate. I’ve done the debt side and the equity side. I’ve been both an investor and a syndicator. I’ve bought to flip and bought to hold. I’ve held some that I tried to flip (sadly). I’ve developed and held commercial—and sold some off as well.
I’ve organized this article around a series of questions and answers that will help us figure out “what are the best real estate investments.” Many overlap. I’ll pepper in examples of how you can get involved and what could go wrong (and right) along the way. And finally, I will tell you where I landed on the question of “what are the best real estate investments” after my long journey through real estate investing.
If you’re considering an investment in real estate, you’re reading the right article. If you’re already a pro, this may bore you. (You may want to skip to the end to read my opinion and consider starting a debate with me. I’d enjoy that.)
How to Invest in Real Estate While Working a Full-Time Job
Many investors think that they need to quit their job to get started in real estate. Not true! Many investors successfully build large portfolios over the years while enjoying the stability of their full-time job. If that’s something you are interested in, then this investor’s story of how he built a real estate business while keeping his 9-5 might be helpful.
What Are the Best Real Estate Investments? Start with Why
Simon Sinek has a great book (and a great TED Talk) called Start with Why. What is your “why”? What are your goals in real estate investing? Please think about this more than I did when figuring out what are the best real estate investments for you. I started out doing it for fun (and because my handy friend needed a job).
Here are some “why”s, some potential goals, for your real estate investing career.
- Are you tired of the instability of the stock market and want to invest in something more stable and predictable?
- Are you looking to build a passive income stream to eventually replace your current income?
- Are you just looking for long-term appreciation?
- Are you trying to create a full time income right now?
- Are you doing this for fun and the challenge? Do you like Chip and Joanna Gaines, and do you want to replicate their success?
Like I said before, this topic is too exhaustive to cover in one article, but I will attempt to share some brief thoughts on each of the questions I raised above here. These questions will help you answer the question of “what are the best real estate investments.”
Potential Goal #1: You’re tired of the uncertainty of the market, and you want to invest in something real.
Check out this graphic showing the Sharpe ratios for various asset classes. The Sharpe ratio shows the return vs. risk of various asset classes.
This alone made me want to invest in commercial real estate, specifically multifamily. But check out how income from multifamily fared during the recent recession:
But you may wonder, as I did, how rents performed over the prior decades. Here is a similar graph over 50+ years:
Getting out of the stock market is a great goal, one I accomplished decades ago. But if this is your goal, you will still need a place to invest.
Potential Goal #2: You’re trying to build a passive income stream to eventually replace your current income.
If this is your situation, I would focus on buy and hold properties—properties that generate nice cash flow (more revenue than expenses) each and every month.
You can do this through the accumulation of single family homes, small multifamily, or commercial (large) multifamily assets. And one benefit is that your return per asset should grow every year as your tenants pay down your debt and you improve the property and increase rents.
If you choose this option, you can accomplish it by finding properties and investing directly, and there are many BiggerPockets resources to help you do this.
Or you could co-invest with firms like Memphis Invest or Morris Invest, allowing them to do the heavy lifting and share in the profits. They acquire and manage assets with your funds, allowing you to stay passive but still get the wonderful advantages of direct ownership of buy and hold single family homes.
Or you can invest with a real estate sponsor/syndicator that will allow you to fractionally own a share of a larger property they find and manage. This can provide great income, appreciation, and tax advantages. That is the business I am in, so I know a lot of other BiggerPockets syndicators like Reed Goosens, Michael Blank, John Cohen, Jake and Gino, Jonathan Twombly, Jered Sturm, and more.
Potential Goal #3: You’re seeking appreciation. You are generally not targeting cash flow.
This can sometimes be accomplished by investing in raw land, but that usually comes with significant risk. If you do choose land, you may want to find land that includes a valuable asset like mineral rights, cell tower rights, or timber. And land that is sub-dividable. All risky business. I have invested in land with all three of these characteristics.
The leased oil and gas land was never drilled on. A total loss.
The cell tower was never built. So I put a trailer on that land and have rented it out for 13 years. Disappointing but still cash flowing. And the land is still appreciating.
And I recently invested with my 23-year old son, Jonathon, who brilliantly acquired a 95-acre parcel for $84,000, then sold some of the timber rights to a logger for $95,000 two months later. And he still has the land. Now that’s a smart investment.
One time I bought an expensive five-acre waterfront tract. I waited two years and was able to subdivide it for a 60% profit. Not bad. Still very risky.
If you have significant funds to invest, you may be able to craft a return with a sponsor/syndicator to achieve this longer-term appreciation goal, pushing returns into the form of appreciation instead of income.
There are investments that achieve both, including many commercial assets like apartments, retail, office, or industrial. So if your answer to “what are the best real estate investments” involves appreciation, you can usually achieve some income along the way.
Potential Goal #4: You’re creating a full-time income right now.
If you are an accredited investor with a lot of money to invest, say a million or more, you have many options with sponsor/syndicators or by investing directly. The world is your oyster.
But if you’re like most beginning investors, you need to create an income through the sweat of your brow. You need to generate income this year.
If that’s you, you will probably want to enter the world of house flipping—acquiring homes below their retail value, adding value, then reselling them quickly. I’ve done over 50 home flips, and I could give you no end of advice.
- Be very careful of location.
- Don’t fall in love with the house.
- Be extra careful of your budget and plan for cost overruns.
- Stage each and every home with a top home stager.
BiggerPockets is full of resources to help you along. One great book for this strategy and many others is by Brandon Turner: The Book on Investing in Real Estate with No (and Low) Money Down.
Potential Goal #5: Fun and challenge. You want to imitate Chip and Joanna.
There’s much I could say here, but here are a few brief thoughts:
- Treat this like a business, and apply the same rules you would otherwise.
- Don’t fall in love with a home just because you like it. (This caused one of my few house flip losses.)
- Buy low. Sell high. (Yes, you can call me Einstein Junior.) Seriously, it’s easy for beginners to mess this one up.
- Factor in every possible contingency and cost overrun, including closing costs, real estate agent commissions, holding costs, and a $3,100 sewer line that has to be dug up and replaced. (Yes, that happened to me on my last flip.)
Whatever your goal, you will need to determine the amount of risk you are comfortable with. This will be a function of your own propensities, your available cash and time, and much more.
What’s Your Risk Tolerance?
In a previous article, I wrote about the importance of understanding the difference between investing and speculating. It’s important to know the difference and to act accordingly. This will impact your answer to “what is the best real estate investment” for your particular situation.
- Do you feel lucky? (“Well do ya–punk?”) Do you want to roll the dice and shoot for a multiple-hundred percent ROI? (I’ve done it, and I will tell you how below.)
- Are you safety-oriented? Do you want to insure your principal at all costs, even if it means a modest return?
- Are you willing to take a moderate risk to get a nice return?
Risk Orientation #1: Speculate in real estate.
It’s OK to speculate, as long as you’re clear on the fact that this is not the same as investing. Investing protects the principal and has the opportunity for return. Speculating hopes for a higher return but is willing to risk the principal in the process.
If this is your angle, there are many approaches you can take, mostly in the realm of real estate development. Subdivisions and many types of ground-up commercial development are examples of this.
Developers are among the wealthiest people in the world. Former developers are among the brokest (that’s a new word) as well. (Does your town still have half-developed subdivisions that broke ground before the Great Recession?)
Risk Orientation #2: Protect your principal at all costs.
At the other extreme, you may want to avoid all risk at all costs. Of course there is no way to completely avoid risk, but real estate provides many avenues to guard your assets.
Most angel investors and tech investors and even stock market investors don’t enjoy the safety that real estate investors enjoy. The Sharpe Ratio (above) documents this. And one of my friends who blew through $71 million of investor dollars in the dot com meltdown agrees. (He invests with me in real estate now.)
If you are trying to avoid risk, this will impact your answer to “what are the best real estate investments.” You can choose direct investments in single family homes, small multifamily, commercial multifamily, and more. And you can invest directly or through a sponsor/syndicator. I would argue that investing through an experienced operator typically provides a safer situation, as they have been there and done that multiple times. Screen them carefully.
Risk Orientation #3: Take on moderate risk for a reasonable return.
Regardless of what are the best real estate investments, one thing I love about real estate is the diversity of options that exist for investors. Most investors in this category would be willing to sustain the risk of little or no gain (on the low end) for the chance of a nicer return (if all goes as planned).
In the single family flip world, this may translate to a $15,000 to $30,000 profit or more per home. I have a friend in LA, BiggerPockets contributor Will Barnard, who is able to get returns of $100,000 or more per home for him and his investors. But these homes are quite pricey.
For single family buy and holds, you may clear $200 to $500 in cash flow or more per month. But after years of having others pay down your mortgage, you may have an asset worth two to three (or more) times what you paid, as well as cash flow several times higher without that pesky mortgage payment. Cash-on-cash return in this world can be estimated at 10 to 20% annually. But total return in the end should be higher. Note that there is cash flow risk due to maintenance, damage, vacancy and more. Small multifamily should have similar returns and risks.
Commercial investing through a syndication model usually provides a lower risk than single units. A vacancy or two in a 200-unit apartment doesn’t impact cash flow as much as a vacancy in one single family home or duplex. And there is usually less maintenance per unit. On-site management can catch problems that a single family manager may miss.
Syndicators that I know typically offer their investors returns along the lines of 5% to 12% annual cash-on-cash, and total annual returns (including principal pay down and appreciation) in the 13% to 22% range. Investors with syndicators have to share return with the syndicator, and the syndicator pays a property manager to alleviate risk and provide efficiencies that small owner-operators can’t achieve.
Though the returns in single family can be higher, the hassles and risks are usually higher as well—often much higher. Ask one of the many people who have abandoned their plan to build up a self-managed single family home portfolio, which brings me to my next major issue on the quest to answer, “What are the best real estate investments?”
The Best Real Estate Investment: Are You Looking for Active or Passive?
- Do you want to get your hands dirty? Do you want to oversee or even undertake your project yourself?
- Are you looking for mailbox money? Do you want to trust an operator, write a check, and then receive a stream of checks for years to come?
- Do you want to be semi-passive? This may equate to a lot of due diligence on your part up front, then trusting asset and property managers to handle things from there.
Active/Passive Position #1: Active Investing
Many BiggerPockets readers want to jump in at this level. And this can be a great option to learn the business, grow from mistakes, and be prepared to manage more and larger projects. My partners let me paint a closet once, and I can tell you there’s nothing like getting your hands dirty.
Seriously, there’s a joy and satisfaction in finding that unique claw foot tub at Black Dog Salvage (that is in my area) or painting the perfect accent wall to offset your new countertops. And while there’s certainly the risk of making mistakes, there’s more profit to be gained by cutting out the middleman, little question about it.
But as I said earlier, you’ll pay for this option with increased sweat, toil, risk, and extended hours. Like I often say, entrepreneurs are flexible and free! We can work any 80 hours per week that we choose. (You may start out this way, but real estate provides more opportunities for freedom and flexibility than any profession I know.)
Many people start out active, but then migrate more and more toward the other end of the scale…
Active/Passive Position #2: Passive Investing
There are at least two ways to get here. As stated earlier, one way is to do the hard work of active management until you can afford to passively manage your investments. Hiring out repairs, maintenance, and property management is a great goal for many direct investors.
Another way to passively invest is to start from one of these two points: either by investing with a sponsor/syndicator, an active partner, or another vehicle like a REIT (real estate investment trust). I did virtually all of my flip homes and waterfront lots with an active partner who took care of the on-the-ground work. Now, as a syndicator, I offer this opportunity to other investors.
I can’t prove it, but I would guess passive investors last longer and are ultimately more profitable than those who actively manage all of their holdings over the long-term. And I would guess they have a better quality of life and aren’t as tempted to do bodily harm to their tenants and contractors. I’m just sayin’.
Active/Passive Position #2: Semi-Passive Investing
I hope this isn’t like semi-boneless ham. Because I’ve never figured that out. Does it have a bone—or doesn’t it?
In their journey toward becoming a sponsor/syndicator, many investors who have the funds to invest passively choose to get involved, to learn the business, to build their resume. Syndicators sometimes put them to work with due diligence—checking comps, helping inspect properties, bird-dogging off-market deals.
This can be helpful for the syndicator and investor. The syndicator gets another set of eyes on the project. And the investor gets a firsthand look at where he or she is investing their hard-earned funds.
Questions to Help You Answer “What Are the Best Real Estate Investments?”
- How important are tax benefits?
- Are you investing your own “regular” money or IRA funds?
- Will your investment desire change over time? Some investors want to be passive now, but get involved when they retire or pass certain hurdles.
- Do you insist on investing locally? Do you want to see/hear/smell/touch it, or are you OK investing across the country?
- How much control do you feel the need to exert over your investment portfolio? Do you want to be in the driver’s seat, or do you trust someone who is focused on this everyday?
- Do you have a preference for commercial or residential real estate?
- What is the airspeed velocity of an unladen migratory swallow? Wait—that was part of another article. Sorry.
So, What ARE the Best Real Estate Investments?
Still wondering, “What are the best real estate investments?” I’m glad you asked. First let me admit that I’m really biased. I co-founded and lead a multifamily syndication firm.
But I remind you that I have experienced many years with all types of real estate and other investments in multiple sectors and a variety of U.S. states. So I didn’t reach this conclusion lightly.
I’ve seen investors make a lot of profit. I’ve seen others get burned out and quit. I know a few that lost millions in the recession. I know some who made money during those years.
I have charts and graphs and demographics and studies that spurred my thinking. Even though it’s important to answer “what are the best real estate investments for me,” real estate in general is a great investment. There are many other great asset classes I didn’t cover. I know some who love storage units. Others kill it with mobile homes and mobile home parks. Dave Van Horn is allowing investors to profitably participate in buying notes.
And investors in other sectors have charts and graphs to back up their opinions as well. I’m sure of that.
So, what are the best real estate investments? Here is my proposed recipe for the perfect investment:
Passively invest in stabilized value-add commercial multifamily properties, through a trustworthy sponsor/syndicator, contracting with a professional property management firm, in a large and growing market.
If this option was somehow ripped away from me tomorrow, I would not despair. There are many other great real estate investments, and I would happily revert to another or try something new.
But the Forbes 400 list doesn’t lie. Most of the wealthiest people in the world made or sustain much of their wealth through real estate. So that’s where I’m investing the rest of my time, my talent, and my treasures on this earth.
So what about you? In your mind, what are the best real estate investments? And why?