Guest Post [Opinion Piece]: Ryan Scribner; Co-Founder, Investing Simple
When it comes to investing in real estate, there are countless options out there to consider. Most experts would recommend that you include real estate, in some form, as part of a well rounded investment portfolio. I have personally invested in real estate through numerous different avenues, and in this article I hope to shed some clarity on what options are available to you.
The first thing to consider is whether or not you are an accredited investor. This is an investor who has special status based on their net worth or level of income. Certain real estate investments are reserved for accredited investors only. In order to be an accredited investor, you must have a personal annual income that exceeds $200,000 for the last two years. You should also expect that to continue in years to come. Another way to receive this status of an accredited investor is to have a net worth that exceeds $1,000,000 excluding the value of your primary residence.
However, recently an amendment has been made to the qualifications for being accredited. If you do not meet the income or net worth requirement, you can still become accredited by fulfilling an educational component. Individuals who hold a current Series 7, Series 65 or Series 82 license are now also considered accredited investors. This is a new opportunity for a wider range of investors to gain access to these investments.
I could discuss dozens of different ways to invest in real estate, however I will instead be focusing on the avenues I have the most experience with. These are either investments I have made myself or ones that I have a vast knowledge of.
My first foray into the world of real estate investing was becoming an owner occupied real estate investor. This simply means that I own a piece of property with multiple units, and I rent the other units out to offset the mortgage. Rather than going out and purchasing a single family residence, I viewed this as a much better option. Not only does this property have income potential, but there are also tax advantages associated with this type of investment.
According to Business Insider, the average mortgage payment is $1,275 per month. Since most people own a single family residence, this is a sunk cost out of pocket with little to no benefits. There is typically no additional income potential from a single family house. The mortgage on my property is currently $2,550 per month which is quite a bit higher than average. However, this is a 4 unit, meaning I rent the other 3 units out. In total, the rental income from this property adds up to $2,075 per month. Based on that, I am paying just $475 per month of the mortgage. This does not include the additional tax benefits of owning rentals.
While this is a good strategy for beginner's to follow, it is a high barrier to entry investment. In my case, I ended up purchasing this property using the FHA loan which required a down payment of just 3.5%. While this sounds low, it ended up being around $22,000 out of pocket for closing costs. Most people simply do not have this much money sitting around. If you are one of those people in this group, the rest of the options have lower barriers to entry!
Another popular option for investing in real estate is the REIT or real estate investment trust. This is, essentially, real estate that trades like a stock. A company owns a portfolio of different properties. Then, profits earned from the sale of properties or income from rentals is passed along to investors in the form of dividends. In order to be classified as a REIT, 90% or more of the profits must be shared to investors in dividends. While this may sound great, there are a number of potential downsides associated with this investment.
First, one of the main reasons to own real estate is to diversify across different asset classes. One issue with the REIT is that it is often directly correlated with the stock market, since they trade on the same exchanges. When there is panic selling within the stock market, you often see the same happening with REITs. This defeats the purpose of diversification.
Second, they lack transparency. You will not be able to view the properties in a user friendly dashboard. Rather, you would have to comb through complicated financial documents in order to decipher your investment.
For both of these reasons, I do not personally invest in REITs. However, this is one of the lowest barrier to entry real estate investments you can make. You essentially just need a brokerage account, which many of us have already, and then you purchase shares of the REIT just as you would with stocks. The price for each share varies based on the REIT, but you can find options in the $50 range or lower.
The next option is crowdfunded real estate investing, which is much newer. Thanks to the internet, people from all over can now pool money together to participate in different investments. With real estate crowdfunding, investors from all over the US chip in money which is used to make private real estate investments. This is very different from a REIT, as the shares you receive are not traded on a major exchange. For that reason, this is typically a long term investment of 5 years or more.
There are many different platforms offering this type of investment, some of which are limited to accredited investors. However, there are many options for non-accredited investors as well. I have personally invested $25,000 into different platforms, and I plan to add more funds in the future.
One key downside to some of these platforms is that you can only invest in portfolios, not individual properties. Many do allow you to pick and choose individual properties, but these require you to be an accredited investor. If you are the type of investor that prefers to do your own due diligence on properties, and pick and choose your investments, these platforms may not be for you. They often only offer pre-built portfolios.
Another potential downside is that the majority of these platforms only offer residential and commercial real estate. There are many other real estate avenues worth exploring, some that even see higher returns on average. In my opinion, crowdfunded real estate is a good option for non-accredited investors who are comfortable with the lack of liquidity. However, if you are accredited, there may be better options available to you.
As mentioned earlier, there are other types of real estate you can invest in outside of just residential and commercial properties. One of these investments is farmland, often considered the new (yet really the oldest asset class there is) big real estate sector to invest in.
According to the USDA, since 1991 the average return from farmland has been 11.5% annually. Any asset that earns an annualized return over 10% for many decades should not be ignored. However, farmland is rarely a part of the average investment portfolio. This is because it was previously difficult to gain exposure to this asset class unless you had the funds outright to purchase the farm itself.
I recently learned about farmland as an investment opportunity through the platform FarmTogether. While I have not invested in farmland yet, it is something I'm currently very interested in and am exploring, hence my decision to write this piece.
In fact, my curiosity about this investment led me to launch a new blog called Farmland Riches where I will be discussing the investment opportunity further and documenting my own investments into farmland.
When you invest your money with FarmTogether, you are actually buying shares of an LLC. As a result, you become a partial owner of the property. If you ended up buying 25% of the shares, you would receive 25% of the returns generated. What is unique about FarmTogether is the level of transparency and control you have. You are able to choose what farms to invest in, how much to contribute and even the crop.
Returns are generated through asset appreciation (the land going up in value while you own it) as well as crop yield and lease payments. You will receive quarterly or annual dividend payments right to your bank account.
FarmTogether takes care of all the heavy lifting for you. They perform their own due diligence on the deals before they are available on the site. In addition, they manage all of the properties. This includes taking care of things such as environmental compliance and water rights. You simply perform your own research and pick and choose what to invest in. Then, they give you a convenient online platform to monitor your investment.
As of right now, you must be an accredited investor to invest through FarmTogether. The minimum investment ranges from $10,000 to $15,000. If you are an accredited investor (and for those who aren't, keep an eye out for when this opportunity might be available to you) this is a very interesting alternative to your traditional residential/commercial real estate investment. I have not invested in farmland yet, but it is something I will be exploring in the future.
In my opinion, real estate should be a cornerstone of any well rounded investment portfolio. If you solely invest your money in stocks, you are not well diversified. A market downturn could result in a 40% to 50% drop in your net worth or more. While real estate does have boom/bust tendencies as well, stocks and real estate rarely correlate directly. I will be continuing to explore other real estate investments in the future, particularly looking into farmland investing. I may also explore purchasing additional rental properties. Nonetheless, real estate will continue to be a part of my portfolio and I hope it becomes a part of yours.
Disclaimer: FarmTogether is not a registered broker-dealer, investment adviser or investment manager. FarmTogether does not provide tax, legal or investment advice. This material has been prepared for informational and educational purposes only. You should consult your own tax, legal and investment advisors before engaging in any transaction.