“I want to invest in real estate, but I don’t have the time. What should I do?”
That is a question that I am asked often at networking events.
They’re thinking about operating a real estate investing business…
Spending hours a day marketing for deals, analyzing deals, working with contractors, managing tenants, and the dozens of other day-to-day tasks that come with the business.
Passive investors leverage operators time while they earn mailbox money!
There are two primary methods to passively invest in real estate: debt and equity.
Debt investors are private money lenders.
As a debt investor you earn interest off loans you make to operators.
Typically loans from debt investors are short-term, anywhere from 24 hours for transactional funding to 3 years for bridge loans.
Since they are shorter-term in nature, there can be a lot of what I call “dead time” in between opportunities.
In other words, when the operator pays back the loan your money might be sitting idle until you find another investment opportunity.
Factoring in dead time your annual returns are oftentimes much lower than the interest rate you are charging.
Equity investors invest their money in deals with operators.
As an equity investor you typically earn a preferred return (also called a “hurdle rate”) on their investment in addition to sharing profits with the operator.
While equity investors expect a higher return since they take on more risk than debt investors.
They also usually benefit from the many tax benefits of owning real estate, including pass-through losses (depreciation).
Equity investments tend to be longer-term, anywhere from 3 years to 10 years.
Due to the longer timeline, equity investments may provide better blended returns over time (dead time being less frequent).
Of course, proper due diligence on both the opportunity and the operator is important before making any debt or equity investment.