Part 3 in a series

First, if you are considering investing funds in real estate without doing the actual leg work, there are many ways to consider handling that investment. But here are some things to consider before you take the plunge:

  • Am I comfortable investing in something where I won’t be there every day to see what’s happening?
  • Do I want to stay hands off, or am I dying to swing a hammer?
  • Do I want to keep my day job and grow my capital, or do I want to jump in with both feet and a blow torch and thaw out frozen pipes on a Saturday night?
  • Can I afford to quit my day job?
  • Do I simply want returns on my money, or would I rather peer down into that toilet bowl?

These questions sound slanted toward persuading someone to invest hands off. But the reality is that jumping in there is right for some, and not for others. Sometimes new investors don’t realize all the options out there, and they start into a project for which they are totally unsuited and unprepared. So this will start the discussion of hands-off investing methods.

My warped humor

Self-directed IRA’s are a great source of funds for hands-off investing, because these are funds you can’t access yet anyway. If you have a conventional IRA from a previous job, or a solo 401(k) from self-employment, you can use those funds to purchase or lend. I personally have a self-directed Solo 401(k), a self directed IRA and a self directed Roth IRA. If you google self directed IRA, you’ll get tons of information.

A few ways to invest in real estate without the day to day management issues:

  • Be the credit partner: you put up your signature and good credit history, and sign on a mortgage, so that the other partner can buy the property using your good credit.  In return for this you get a piece of the ownership, and a mortgage in your name, but usually don’t work on the day to day property management or rehab.  The downside to this is that you are risking your credit score and are on the hook for the mortgage should the property values plummet further.  And an unfinished rehab should your partner be unable to finish the project will leave you…..well you get it.  You’d be better off if you had some day to day knowledge of the management or the project and could step in if the unforseen happened.
  • Be the money partner: you put up your money to fund the deal, either the entire purchase and rehab, or the downpayment money for a conventional or hard money loan.  You are typically an equity partner, meaning you get a piece of the ownership of the deal, but don’t have to manage the purchase, the rehab, the rental or the sale of the property.  Before we go any further, please check out an article I wrote about protecting your capital when investing in real estate.  Sometimes when you are a money partner, you hold a mortgage in second position, so you should understand the ramifications of this.
  • Hire a property manager: you can hire a manager for property that you hold for rental income. Bear in mind that if you participate in a large property, you will almost always have a property manager, sometimes onsite.  But for single family and small multi’s, the cost to hire a manager is high, cuts into your cash flow, and is no guarantee of a trouble-free investment.
  • Lend the money: There are pros and cons to this strategy as well, and the next couple of posts will go into more detail on exactly this.  You can be the first to get paid, and sometimes participate in the profit in the deal at the same time.