Archive for November 30th, 2010

In part I of this three-part series,we talked about how real estate investing is changing. In part 2, we discussed a key opportunity for implementing that change: land contracts. In part 3, the topic is passive investing.

Once you’ve worked hard to make your money, you want your money to work harder than you did. That’s really the concept behind passive investing: doing minimal work for maximum return. That’s everyone’s dream.

The problem, frankly, is that there are opportunity costs everywhere. The less work you do, the more work someone else is going to have to do, and you’re going to have to pay that person to do it. The trick is to find the happy medium.

There are several ways people currently conduct passive investing. You can invest in real estate investment trusts (REITs). Generally found through financial planners and regulated by the SEC, REITs tend to invest in large commercial properties. You can expect a low return (about a four-to-eight percent monthly cash distribution) and some percentage of any profit when the property is sold in three to five years). Minimum investment is usually $100,000, and you can add further investments in increments of $25,000, $50,000, or more later.

You could go to a real estate agent who does property management and invest a minimum of $50,000 to $75,000 there. You should expect to get ongoing reports about your properties. But you’ll also have to pay ongoing fees for repair and other upkeep. The fact is, if you’re going to be completely passive, other people are going to have to do more of the work, so you make less money.

In the world of distressed properties, the best model is to find a local expert and work with them to manage the sales, rental, and upkeep. You put your money in, and that person does the work. You can own it, and you’ll make more money. DBNR is focusing on this area, and we can handle the property management. There are fees involved, but because the properties are distressed, the potential profits are higher.

A couple of points that you should consider when it comes to passive investing:

• You can be as passive or as active as you want. Just make sure the people with whom you’re investing agree on the level of involvement you want to have.
• Make sure what you’re investing is discretionary income, because you will not be able to liquidate it quickly.
• Think about passive investment as a group to make your money go farther. In the 90s, a womens’ investment group met in my real-estate office, and they did pretty good.
• Remember that the IRS has specific rules regarding what constitutes passive investing, some of which relate to real estate investing and some of which relate to entities such as limited liability corporations.

My overall point is this: if you want to invest in real estate, but don’t feel you have the expertise, worry not – there are other options for you to take advantage of in this area that still have profit potential.