Real Estate Investors - Know Your Risks

Investing in real-estate can be a good move, and there are several options in the market for you.  Each option comes with its own set of risks and benefits.

Here is the breakdown, courtesy of Zillow Blog.

1) Direct ownership

Direct ownership entails buying property on your own (or with a spouse), and handling all operations - like maintenance, leasing, and property management - either by yourself or by hiring a property manager.

Benefits: You make all of the decisions and earn all profits, while directly controlling the asset.

Risks: Bad tenants other other management hassles, making a poor financial choice, losing money on the sale of the property  and assuming full liability past insurance coverage.

2) Partnerships with close or well-known associates

This involves partnering with a friend, or a small group of investors similar to yourself, or family members.  It is extremely important for you to understand your co-investors well, alongside their financial position, motivation, work ethic, and to what extent they want to share in the management of the property.

Two big suggestions for this venture:

1. Have a written agreement established between the parties
2. One party should be responsible for the management of the property (or managing the property manager), and should be paid for handling the management.  This eliminates the "who should deal with the issue" conversation, and help reduce tension amongst the members of the party.

Benefits: Shared decision making and profits, and all partners directly control the asset.  This can be a plus IF all partners are on the same page.

Risks: You could choose partners who don't have the financial stability needed to handle major issues, or partners with differing strategies on how to rent, manage, or improve the property.  Many of the same issues for direct ownership (above) also apply.

3) General or limited partnerships

This includes tenant-in-common investments and private real estate investment trusts (REITs), often pitched in newspapers, real estate clubs, financial institutions, and tenant groups.  These investments involve you totally trusting someone else (a "sponsor") to totally handle a large portion of your net wealth.

The biggest issue: 

Most investors don't do even the most basic review of their sponsor - and even if they want to, it can be very hard to do.  Investors rarely review a sponsor's credit report, for example, or their investing history, their bank records, criminal or civil litigation histories, or past clients.

Benefits: You could potentially get a fair return on your investment, despite the risk.  You wouldn't deal with management hassles, and the sponsor is most likely more experienced in investing than you are.

Risks: You have no control and could find yourself dealing with negligent sponsors and liability concerns.  You could also have low investment returns and potentially face the loss of your investment.

4) Publicly traded real estate investment trusts

These are essentially investments in a big company that is involved in the business of buying and owning property.  A REIT buyer is investing not in a property, but in the ability of a particular management company to make good investing decisions on behalf of their shareholders (you).  Before making a decision, you're going to want to look at a particular company's results and dividends.

Benefits: You have no management responsibility whatsoever, no liability (past your initial investment), and an experienced management company with liquidity in selling the shares who is investing your money

Risks: You could potentially lose your total investment.  Shares and company value are subject to all of the regional, national, and stock market influences.  Share value could diminish due to these concerns, despite the management of the company.

Which category do you fall into?  Are you curious in exploring other investment avenues?  Send me an e-mail or give me a call and we can discuss your concerns.

We are not licensed attorneys, accountants, or financial advisors.  As with any major investment decision, you should consult the appropriate subject matter experts in these areas.  We're happy to connect you!