Liz Brumer-Smith


The industrial sector of commercial real estate (CRE) is doing incredibly well these days. As online shopping increases, the demand for sites to manufacture products and store goods is higher than ever.

Real estate investment trusts (REITs) let investors with less capital and time participate in the potential gains of industrial CRE right now. Let’s take a look at three of the best industrial REITs you could buy right now.

Industrial REITs

Industrial real estate includes:

  • warehouses/distribution,
  • manufacturing,
  • refrigeration/cold storage,
  • telecom/data hosting centers,
  • flex,
  • light manufacturing,
  • research and development (R&D),
  • biotech, and
  • showroom properties.

According to the NCREIF property index, the industrial sector has achieved an impressive 13.86% return from Q3 2018 to Q2 2019 and is currently the top-performing property type in CRE. Occupancy rates have consistently remained above 95% and the sector as a whole has provided consistent year-over-year rental growth.

There are currently 14 publicly traded industrial REITs with a total market cap of $111.67 billion. However, industrial REITs aren’t high-paying dividend investments compared to other REIT types like apartment REITs or mortgage REITs. Industrial REITs act more like growth stocks than top-yielding dividend players.

Currently, multiple industrial REITs are overpriced. While the top three industrial REITs described below present potential growth and opportunity, investors may fare better by waiting for pricing to settle some before buying. Always conduct your own due diligence to determine if a company meets your investment principles and risk threshold or if it’s the right fit for you.

COMPANY Market Capitalization Dividend Yield
STAG INDUSTRIAL INC. (NYSE: STAG) $4.07 billion 4.76%
PROLOGIS (NYSE: PLD) $56.55 billion 2.47%

Three of the best industrial REITs to buy right now

1. Americold Realty Trust

Americold Realty Trust is one of the newer industrial REITs on the block, becoming public in January of 2018. It’s the only publicly traded industrial REIT that focuses on the operation and development of temperature-controlled warehouses. It controls 178 properties and one million square feet across five countries, including facilities for some big retail names like Trader Joe’s, Safeway, Kroger, and Kraft.

While the majority of its income stems directly from warehouse storage facilities, it also has a third-party management and transportation branch accounting for roughly 6% of its net income. According to 2019 Q3 results, Americold has a total revenue of $466.2 million, a 16.0% increase over the same quarter last year.

The REIT’s average occupancy is lower than the industry average at 85%, but its consistent earnings, strong track record, and a core FFO of $0.87 year-to-date make this one of the best industrial REITs right now.

2. Stag Industrial, Inc.

Stag Industrial, Inc. focuses on purchasing and managing single-tenant industrial properties with 81.2 million square feet under management across 38 states. Third-quarter earnings, which were reported on Oct. 30, 2019, had the REIT’s revenue at $102.42 million with a core FFO of $0.46, a 2.2% increase compared to Q3 2018.

Stag Industrial, Inc. is growing rapidly, having acquired 2,000,000 square feet of industrial space in the last two years. Stag prides itself on “green leasing.” Its newest project is two rooftop solar systems in Minnesota that are projected to produce power for around 200 households.

Offering the highest dividend return of the three REITs discussed today, Stag’s coverage ratio is 4.6 times, which is close to par for the industry standard for equity REITs at 4.7 times, placing it within a safe leverage range.

3. Prologis
Prologis is one of the larger industrial REITs with holdings in 19 countries across four continents. Founded in 1983, this company has grown tremendously, with $111 billion in assets under management and housing 797 million square feet.

Prologis’s 2019 third-quarter press release produced positive news with the company having “record rent increases and significant earnings from our Strategic Capital business,” according to Hamid R. Moghadam, chairman and CEO. Core FFO increased to $3.30 per share.

Additionally, occupancy remains high at 97.5% and the company has $4.9 billion in liquidity. While the REIT has a strong past performance and a coverage ratio of 3.9 times, that’s less than the industry standard for equity REITs of 4.7 times. Before buying, consider the risk of this stock and keep an eye out on its pricing — it may be overpriced at this time.

Look beyond the best industrial REITs to buy now

The demand for industrial real estate will likely continue because of its integral role in the global economy. Investing in industrial REITs can be a great opportunity to participate in the continued growth of this sector.

Just because these are some of the best industrial REITs to buy right now doesn’t mean they’re the only options. There are plenty of other good REITs available. Vet the possibilities and find the right REIT for you.

Author: Liz Brumer-Smith

Source: Fool: 3 of the Best Industrial REITs Right Now

Most new investors in active real estate start with a traditional method like rehabbing or buying and holding single-family rentals. They might invest in commercial real estate like apartments, storage, or strip malls, too.

In these examples, the investor buys the property and manages the asset by fixing it up or renting it to a tenant. In many cases, the investor does both. Depending on how you manage the assets, these methods of investing can be great ways to generate income, receive tax benefits, and build wealth — but they aren’t the only ways.

Mortgage notes are an alternative asset class within active real estate investing. They have many benefits and present unique opportunities. They also earn higher-than-average returns for real estate investments.

Let’s dive into what it means to invest in mortgage notes by starting with the basics.

What’s a mortgage note?

When a home buyer or investor wants to buy a house but isn’t able to pay cash at closing, they get a loan. They pay part of the purchase price as a down payment and borrow the remaining amount from a bank or lending institution. In exchange for the money, the lender has them sign a promissory note and a mortgage.

A promissory note, often just called a note, is signed by the borrower and is a promise to repay a debt. This document outlines:

who borrowed money from whom,

  • how much was borrowed,
  • the interest rate of the loan,
  • the timeline for loan repayment, and
  • what happens in the event of default.

A note isn’t typically recorded in public records, but it’s a legally enforceable document.

A mortgage is a separate document that collateralizes the lender. In short, it says that the lender can take possession of the home if the borrower stops paying. It outlines

  • the roles and responsibilities of the lender and the borrower,
  • what would qualify as a breach in the agreement, and
  • what property the mortgage is tied to.

These two documents do different jobs, but they go hand-in-hand. You would never create or buy a note without a mortgage and vice-versa.

The different types of mortgage notes

Mortgage notes can be categorized by type, lien position, performance, and asset class. Let’s take a look at each.


Mortgage loans can be broken down into several sub-categories:

  • Secured.
  • Unsecured.
  • Private loan.
  • Institutional loan.

If a loan is secured (or “collateralized”), there’s a tangible asset tied to the loan — in the case of a mortgage, this asset is property. This means if the borrower stops paying, the lender can take legal action to gain title to the real estate or asset. If the loan is unsecured, there’s nothing collateralizing the loan.

A mortgage note can also be classified by who created it, as in the case of institutional or private loans. An institutional loan means a bank or lending institution created the mortgage note. These loans have strict laws and guidelines for underwriting. They’re held to a higher standard than private loans and must comply with the Dodd-Frank Act and Bureau of Consumer Financial Protection regulations.

A private loan means the mortgage note was created by a private individual. This could be a family member, friend, colleague, private lender, or even the seller of the home. In some instances, if the seller owns the property free and clear (with no mortgage), they can create and hold a mortgage for the buyer. These are called seller carry-back loans, seller-financed loans, or owner-financed loans.

A private loan still has a note and mortgage, but the underwriting process isn’t as heavily regulated. The language that goes into the documents is up to the lender. Some use attorneys or title companies to create the documents while others don’t.

Lien position

The lien position categorizes the position of the lender’s claim on the asset. Ultimately, it determines which lenders get paid first if something goes wrong.

Mortgages that are in first position have the highest claim. Any loans created after the first are second-position, third-position, and downward from there. A second lien or junior lien is a subordinate mortgage note. The first position will always be paid before the second position gets paid.

Here’s an example. Before the 2008 crisis, banks regularly let people buy properties with little or no money down. If someone wanted to buy a house for $200,000, they could get a first mortgage for $180,000 — this was recorded in public records first. They could also get a second mortgage for $20,000, which was recorded later.

The buyer paid two separate mortgage payments each month. If they stopped paying and the bank foreclosed on the house, the first mortgage would get paid off before the second mortgage received any money. This practice isn’t as common since the Great Recession, but there are other forms of second mortgages. A home equity line of credit (HELOC) is one example.

That’s why second-position or junior-lien mortgage notes are a riskier investment. There’s typically a first lien in priority position, and if things go poorly, they’ll get their money first.

Asset class
You can also classify a note by the underlying asset class. There are mortgage notes on every type of real estate, including:

  • single-family homes,
  • small multi-unit homes,
  • townhomes,
  • apartment complexes,
  • commercial strip malls, and
  • industrial buildings.
  • Most of the time, however, they’re categorized as residential or commercial mortgage notes.

Loan performance

The last way to categorize a mortgage note is by its performance or payment history.

If a borrower has paid their mortgage on time and never missed a payment, the note is “performing.” If the borrower has stopped paying their mortgage note, they’re in default. The note can be categorized as 30 days late, 60 days late, 90 days late, or 180+ days late. Typically, if borrowers haven’t paid in the past 90 days, their loans are categorized as “non-performing.”

What does it mean to invest in mortgage notes?
Investing in real estate mortgage notes is a lot easier than you may think. When someone buys a property, whether it’s a personal residence or an investment property, the buyer is put on the title. They’re on the deed and are responsible for maintaining the property, having adequate insurance, and paying taxes.

The lender has a vested interest in the home but isn’t responsible for property upkeep, taxes, or insurance. They simply collect a principal and interest (P&I) payment each month until the note is satisfied. If something goes wrong with the property, like the roof needing to be replaced or a plumbing issue, the owner has to take care of it — not the bank.

When you buy a note and mortgage, you’re buying the debt that remains to be paid on the note, secured by the asset outlined in the mortgage. You’re not buying the property — you’re buying the debt and secured interest in the property.

Essentially, a note buyer steps into the shoes of the bank. You can now collect the remaining debt on the note and receive the monthly P&I payments. You can also take legal action to regain title in the event of default.

While many loans are bought and sold at full price, some can be bought at a discount. If the loan is non-performing, or the note holder needs to sell the note badly enough, they may be willing to part with it for less. In my experience, you can negotiate a discount of 5%–40% off the current market value or unpaid balance, whichever is less.

Non-performing notes may not seem like a worthwhile investment since the borrower isn’t paying anymore. They have a high risk of default, and that’s bad for cash flow.

But investors often use these notes to acquire real estate at a discount. Once the tenant defaults, the investor can take possession of the property and create a long-term rental, fix and flip the house, or simply sell it.

There are significant risks to using mortgage notes in this way, but if you’re smart about your investment strategies, it can pay off.

Investors can also modify the terms of the mortgage. For example, if you buy a non-performing note, you might lower the balance of the note, reduce the interest rate, decrease the monthly payment, or otherwise assist the borrower in making good on their loan. This can result in very high yields if you buy the note at a discount.

Over the past 10 years, the cost of non-performing notes has risen — but you can still get them at 20%–40% off of the current market value or loan balance.

Where can I find mortgage notes to buy?

Banks create and sell mortgage notes as a part of their business model. They make their money from lending and receiving interest. The more they lend, the more they make.

There are guidelines for how much money a bank has to keep in reserve in order to lend — this amount is called a reserve ratio. If a bank has low liquidity, they may sell some of their loans in a “pool,” which is a group or package of mortgage notes. Other banks, hedge funds, and private individuals can buy these pools.

Hedge funds and banks are the largest buyers of mortgage notes direct from banks because you typically need millions of dollars to purchase them in bulk. For this reason, it can be difficult for individual investors to buy directly from banks, though it can be done.

Individual sellers that created a private mortgage note may also want to sell simply for the benefit of having cash now. Maybe they’re experiencing hardship and need cash today rather than waiting for the remaining term of the note to pay off.

You can find private sellers of mortgage notes on online marketplaces like Notes Direct or Paperstac. You can also buy a list of private individuals who own or hold a note from a company like Listsource. You might send the noteholders a series of letters or postcards or get in touch with them another way to see if they’re interested in selling.

If they need cash, banks and individual sellers will sell at a markdown. When you buy at a discount, your rate of return is higher than the nominal interest rate on the note.

Performing notes are typically more expensive. While you can buy them at a discount, it’s typically only a slight discount from the remaining balance of the note. Non-performing notes are often sold at steep discounts from the balance owed or the value of the property, whichever is less. Pricing is also higher on first-lien mortgage notes compared to junior liens. The more secure the position, the higher the price.

Let’s look at a few examples to see how this works.

Buying a performing mortgage note

Let’s say you find a private mortgage note that the seller needs to get rid of. The note is secured by a mortgage on a single-family home. The property originally sold for $150,000 and the borrower put down $15,000. That means the original loan was for $135,000. The note is a 5% fixed-rate 30-year loan, making the borrower’s payment each month $724.71.

The borrower has been paying the loan for seven years and is current. So, at the time you’re evaluating the note, the unpaid balance is $118,725.68. There are still 276 months (23 years) left.

You decide you’ll only buy this note if you can receive a 10% return on your money, or a 10% yield to maturity, so you offer $78,162. That’s $40,563 less than the current unpaid balance, or a 34% discount to the face value of the note.

This may seem like a big loss, but the seller gets $78,162 immediately and has already collected $60,875 in principal and interest to date. If the seller takes the cash now, he or she is essentially collecting $146.97 less per month from the borrower’s P&I payment over the remaining 23 years.

If the seller needs the cash, they may accept that offer. In that case, you receive a nice 10% internal rate of return (IRR) and a passive $724.71 of cash flow each month, provided that note keeps performing for the remaining 23 years.

Buying a non-performing mortgage note

Let’s look at a different example. A hedge fund finds a bank with a low reserve ratio and a high proportion of non-accrual loans (180+ days past due). The bank sells a pool of non-performing loans to the hedge fund. The hedge fund keeps some of the notes that meet its criteria but decides to sell the notes that don’t fit its investment model.

The hedge fund sends you a list of non-performing loans for sale and you look through the list to determine which assets you want to buy.

A non-performing note where the borrower has not made a payment in over two years piques your interest. The current unpaid balance is $128,934 with 214 payments remaining. The note is secured by a nice single-family home in Georgia that you believe is worth $140,000 as-is. The original note had a 5.5% interest rate for 360 months (a 30-year loan) with a monthly payment of $794.90. Because it’s non-performing, you’re able to pick this up for a steep discount — just 58% of the unpaid balance, or $74,781.

Now that you own the note, you can reach out to the homeowner and see why they stopped paying. Then you can find out if they want to keep the property and work out a plan to get them paying again if they’re interested.

Because of the discounted purchase price, you have flexibility in the terms of the loan. You could lower the interest rate, re-amortize the loan, decrease the balance, or offer other conditions to make the home more affordable. If you simply get the borrowers to start paying their monthly mortgage of $794.90 again without adjusting any of the terms of the original loan, you’d get a 10.92% yield to maturity.

There are several other scenarios where you could increase the overall yield to maturity by adjusting the terms of the loan. You might increase the interest rate, re-amortize the loan, or shorten the length of the loan to meet your desired rate of return.

In many cases, these adjustments are temporary. A borrower might agree to pay you a lump sum upfront to show good faith, then pay a lower amount each month until they can get back on their feet. There are many situations you might encounter when buying non-performing notes, and you’ll have to assess each one individually.

If the borrower isn’t interested in keeping the home or can’t pay, there are other options. You can work out a deal where the homeowner signs the deed over to you and you eliminate the mortgage and their obligation to pay the debt. This is often called a deed in lieu of foreclosure. It’s not always the best solution, but it’s an option for many lenders and homeowners.

If they aren’t interested in either option, you can start the legal process of foreclosure. Foreclosure varies from state to state in cost, length, and procedure. It’s important to know the relevant state foreclosure laws before you buy a note. After you foreclose, the home goes to public auction. If an investor buys the property at the auction, you get paid. If it doesn’t sell, you’re put on the title and own the physical real estate.

Once you gain title to the property, you can:

  • sell it as-is, like an REO sale;
  • fix it up and sell it;
  • keep it as a rental (you may have to do repairs); or
  • sell it by creating a new mortgage note.

It’s important to note that this strategy of active real estate investment has inherent risk. The borrower could trash the home before they leave. Or they could contest the foreclosure and cause delays and legal expenses. They could even file bankruptcy, which can halt your collection efforts completely.

Non-performing notes can be a lucrative way to create passive income by working with the borrower to create a performing note. They’re also a great way to gain title to the physical real estate at a discount. But they can also be very risky.

The best strategy with mortgage notes is the one we’re going to talk about next.

Creating a mortgage note from your own real estate

When I first started investing, a wealthier and more experienced colleague told me to buy real estate, rent it, and create a note when I’m ready to retire. It’s great advice.

With this method, you can take advantage of the tax benefits of owning physical real estate, make money through the cash flow of a rental, and enjoy the appreciation of the property. Then, when you’re ready to sell, you create a seller-financed note in which you hold the mortgage, receiving passive income in the form a P&I payment. Pretty genius, right?

An added benefit of this model is that you break up the tax hit from capital gains over the life of the loan rather than paying it in one tax year. From a tax perspective, it’s one of the best things you can do once your depreciation calendar runs out on a property.

Let’s say you own a single-family home that you kept as a rental for 30 years. You had a mortgage on the property, but using the additional cash flow from the rental, you paid off the 30-year fixed-rate mortgage in just 15 years. You now own the property free and clear. It’s performing well, but your depreciation calendar has run out. You no longer have the tax advantages of holding this physical property and would rather buy a new rental to take advantage of the tax deductions. But if you sell, you’ll be hit with capital gains tax. So instead, you create a mortgage note.

You list the property for sale at $200,000 and offer owner financing. A nice couple wants to buy the property at your full asking price and has $30,000 to put down. Their credit is good, but they’re unable to get traditional financing because they’re self-employed. You offer them a 20-year fixed-rate mortgage at 6.5% interest. They’re happy to find a dream home they can finance and you’ve just created an additional passive income stream with tax benefits.

You now get to collect $1,267.47 every month and have zero responsibility in maintaining the home, paying taxes, or insurance — the new homeowner does that.

Because you collect interest, you won’t only get your $170,000 back, but you’ll also make an additional $134,194.71 in interest over the entire 20 years!

To keep you compliant with the Dodd-Frank Act, it’s best to use a licensed mortgage loan originator (LMLO) to underwrite and create your mortgage note. LMLOs charge nominal fees for their services. They’ll prepare the loan paperwork and confirm that the potential buyer qualifies and can afford the home.

There’s always a risk that the borrower stops paying, which turns this from a passive investment strategy to a very active one. You’ll have a lot of work to do if you want to get them paying again or resolve the situation another way. This is especially true if you lend to someone who can’t qualify for bank financing because of financial problems. Consider this risk before determining if creating a mortgage note is the right investment option.

What are the expenses of owning a mortgage note?

Expenses are rather low with mortgage notes, especially compared to rental property.

Most people hire a third-party servicing company to handle the loan. The servicing company keeps records of the payment history, can collect payments on your behalf, provides the borrower with their balance and statements, and separates the interest and principal received in each payment.

While you can service a loan yourself, this industry is heavily regulated. To keep your risk mitigated, we suggest paying the low monthly cost, which can range from $20–$40. The servicer can deduct the fee from the buyer’s mortgage payment, making it even easier.

Non-performing loans have more costs associated with them. There are legal fees involved with regaining the title, as well as securing and maintaining the property.

Additionally, the borrowers may not have paid their taxes or insurance in several months or years — those payments become the responsibility of the bank or noteholder.

Experienced note buyers factor these costs into their offer price and know exactly how much they expect to spend.

How do I know a good note from a bad one?

There’s a saying in this industry: If you wouldn’t want to own the property that the mortgage note secures, don’t buy it. While you’re actually buying the paperwork relating to the loan, the property is the collateral and what secures you. Make sure the collateral is a quality asset. Due diligence on a mortgage note often includes finding out:

  • the value of the property in its as-is condition;
  • if there are any liens or encumbrances on the property that might affect or jeopardize your position;
  • if there are any unpaid taxes, potential tax liens or tax deed sales;
  • the annual tax rate;
  • if all required paperwork (the original note, mortgage, and other documents) is in possession of the current lender;
  • the payment history on the note; and
  • the borrower’s credit score.

What’s the risk of investing in mortgage notes?

A common concern when an investor buys a performing note or creates a mortgage is the risk of default. If the goal of the investment is to receive cash flow as passively as possible, the last thing you want is for the borrower to stop paying.

For this reason, it’s important to thoroughly review the borrower, including their income, credit history, down payment contribution, and if applicable, pay history. According to the Federal Reserve Bank of St. Louis, the residential mortgage default rate nationwide was below 3% in Q2 2019, but was over 11% in 2010. Economic and financial conditions can change a borrower’s ability to pay at any moment. Weigh the risk of default before buying a note.

One of the greatest concerns when buying non-performing mortgage notes is not being able to talk to the borrower or see the interior condition of the property before buying the note. To help alleviate some risk, assume the property is in terrible condition. If you gain title to the property, you’ll have a welcome surprise if it’s in better condition than you anticipated.

Another way to minimize risk is to get the largest possible discount when purchasing the property. The lower your investment, the more your risk is mitigated.

Where can I learn more about investing in mortgage notes?

If you’re interested in learning more about this method of real estate investing, read as much as possible. Invest in Debt by Jimmy Napier is one of my personal favorites on this topic.

There are many educators who specifically teach the ins and outs of investing in mortgage notes, as there are many laws, rules, regulations, and steps you must know before making this a successful business. Some of these educators charge a few thousand dollars for classes, while others charge tens of thousands.

If you’re interested in formal education, do your research on the educator. Read reviews, talk to current students, and weigh the cost of the course. Rarely does the experience and knowledge of one person justify a cost of tens of thousands of dollars, but that’s up to you to determine.

Mortgage notes can be an incredible vehicle for building wealth and are one of the more passive streams of income you can get as an active real estate investor. If you do your research and carefully weigh the risks involved, it can be a great way to invest in real estate without becoming a landlord.

Author: Liz Brumer-Smith

Source: Fool: A Complete Guide to Investing in Real Estate Mortgage Notes

There’s always a “hot” part of real estate investing. One year it’s flipping houses and the next it’s vacation rentals.

Determining the best way to invest can be challenging. There are many options, and every investor has different needs.

To make it easier, here are seven popular ways to invest in real estate. They’ll help you determine what makes an avenue of investing the “best” for certain investors — including yourself.

Invest in REITs

Investing in a real estate investment trust (REIT) is one of the easiest ways to get started. There’s a low initial upfront investment, shares are easy to buy, and REITs show strong performance over time.

These companies pool investor funds to purchase and manage commercial real estate. By purchasing a share of a REIT, your investment is spread across several assets. Returns are distributed in the form of a dividend. The chart below illustrates the performance of a $100,000 investment in equity REITs compared to the S&P 500 based on annual return since 1998.

The average return for REITs since 1998 is 10.26% while the S&P 500’s is 8.10%.

REITs are best for the following investors:

  • Those who have limited funds to invest or want liquid investments. You can invest in REITs with a few hundred dollars from a brokerage account and sell at any time.
  • Those who have time to conduct due diligence on REITs to determine which are a good fit for their portfolio and financial goals.
  • Those looking for passive returns.

Invest in Real Estate ETFs

Real estate exchange-traded funds (ETFs) are like mutual funds. But instead of stocks and bonds, the fund manager buys shares in REITs.

The main advantage of investing in a real estate ETF is diversification — the fund manager selects various companies across multiple commercial real estate sectors. Returns are paid to investors as dividends.

Many real estate ETFs invest in similar mixes of REITs, though they vary in the number of shares owned, resulting in varied rates of return. Below are two of the largest publicly traded real estate ETFs and their performance in comparison to the S&P 500.

Real estate ETFs are best for the following investors:

  • Those who have limited funds to invest or are looking for liquid, diversified investments. You can invest in real estate ETFs with a few hundred dollars from a brokerage account and sell at any time.
  • Those who have time to conduct due diligence on various ETFs to determine which are a good fit for their portfolio and financial goals.
  • Those looking for passive returns.Invest in residential rentals

Residential real estate is a property with one to four units. This might be a condo, townhome, garage apartment, single-family home, duplex, triplex, or fourplex. Investors in residential rentals rent them to tenants over a set period — typically one year or more. Ideally, the income from the property exceeds expenses, creating positive monthly cash flow.

Residential rentals are common strategies for real estate investments. Owning a residential rental can be simpler than owning other property types, like commercial real estate.

Buying residential real estate is an active form of investing, as the investor is directly involved in the process of finding, acquiring, and managing the investment — including tenants. Hiring a third-party management company minimizes your involvement but doesn’t eliminate all obligations.

Although this can be profitable, it requires significant time and effort. In most cases, buying a rental property requires more money up front than investing in a REIT or real estate ETF. Plan on at least a few thousand dollars, but know that some lenders require tens of thousands. However, there are ways to buy a property with little money down.

Residential rentals are best for the following investors:

  • Those who have some investment funds saved and can allocate $5,000 or more to their investment.
  • Those who want the cash flow or tax benefits from owning investment real estate and can dedicate time and effort to owning and managing the property.
  • Those willing to learn about residential property investing and conduct due diligence on rentals.
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Rehab a property

When most people think of investing in real estate, they think of flipping houses. Popular HGTV shows like Rehab Addict, Flip or Flop, Fixer Upper, and Property Brothers, have romanticized rehabbing properties as the ideal real estate investment.

Rehabbing (or “fixing and flipping”) is the process of buying a property in need of repairs at below market value and improving the property to increase its value.

Although TV shows make it seem simple, rehabbing a property that produces a profit is no easy job. It’s an active investment strategy that requires time and effort to find new investment opportunities, negotiate acquisition, manage contractors, keep costs down, and sell the property quickly.

Remember that you only get money when you buy, fix up, and sell a property. And, although you might see profits that range from a few thousand to tens of thousands of dollars in a few months, it’s easy to lose money doing this, as well.

Rehabbing is best for the following investors:

  • Those who enjoy construction or improving properties. At a minimum, you should have a good eye for design and basic construction knowledge so you can manage contractors.
  • Those who want to earn income quickly and are willing to lose some of the tax benefits from owning rental real estate in exchange for larger paydays.
  • Those willing to learn about and manage the rehabbing process.

Invest in a vacation rental

Vacation rentals are becoming a popular real estate investment vehicle largely due to the rise of home-sharing companies like VRBO and Airbnb. A vacation rental can be a room or a home that’s rented for a short term, often nightly or weekly. It can be a great way to generate cash flow.

The success of a vacation rental is largely based on the location, amenities, and quality of the property. Short-term rental demand in the area also plays a major role. Owning vacation rentals requires time spent managing online listings, communicating with potential renters, managing calendars for bookings, and ensuring check-in and turnover are handled effectively.

This type of rental property has a higher vacancy rate than other rental types and is restricted in some places.

Vacation rentals are best for the following investors:

  • Those who have some investment funds saved and can allocate $5,000 or more to their investments.
  • Those who own property in decent condition in a desirable area for vacation rentals and are willing to share or rent space. Always check your local laws to ensure short-term rentals like this are allowed.
  • Those who want to earn cash flow and are willing to learn about, manage, and rent a vacation property.

Invest in commercial property

Commercial real estate (CRE) is used for business purposes, such as retail or office space. Industrial buildings, apartment complexes, mobile home parks, and assisted living facilities also fall into this category. Commercial real estate is costlier than residential real estate, often requiring a greater down payment. There’s usually more property to manage, too.

Investors in CRE need to dedicate ample time to learning how to properly invest in and manage the asset class before finding, buying, and managing an asset. With the larger upfront cost and significant time and effort required, many choose to invest in commercial real estate through alternative methods, such as REITs, ETFs, partnerships, or crowdfunding.

Commercial property is best for the following investors:

Those who have significant investment funds saved and can allocate $50,000 or more to their investments.
Those who want cash flow or tax benefits from owning commercial real estate and are willing to dedicate time and effort to owning and managing the property.

Invest in real estate crowdfunding deals

Real estate crowdfunding connects accredited investors with investment opportunities. These deals pool money from multiple investors to fund a real estate investment. The asset is owned and operated by the sponsor and the sponsor’s management team, making this a passive investment.

Investors get returns in multiple ways, including dividends and preferred returns over time. Crowdfunding is a risky investment option and many variables affect the quality of an investment.

If you’re interested in this avenue of investing, take a look at our complete guide to crowdfunding to determine whether it’s right for you.

Real estate crowdfunding is best for the following investors:

  • Those who are accredited and have $500 or more available to invest.
  • Those who can review commercial investment opportunities and conduct due diligence on the quality of the investment.
  • Those who want higher returns than most other avenues offer and are willing to wait longer to receive them.
  • Those looking for passive returns.

What’s the best way to invest in real estate right now?

There are times when specific avenues of real estate investing may be better than others because of current market conditions, but rarely is there one “best” way to invest over the long haul. The current investment fad may not be the best investment in 10 or 20 years.

There’s no perfect model for investing. People have different financial goals, means, areas of interest, and specialties.

If you hate managing people and have a poor eye for design, rehabbing probably won’t be good for you. If you’re short on time and can’t consistently find and review investment opportunities, never mind manage one, maybe real estate ETFs or REITs are better.

In general, the goal of investing is to build wealth over time and find investment opportunities that provide stable growth, income, and returns. Make sure you understand how the investment works, including how the return is calculated, the costs associated with that asset type, the risks, and the factors that contribute to a quality investment over time.

No matter which investment strategy you pursue, always conduct due diligence on the quality of the venture and the viability of the overall return. Continue to educate yourself on how to invest in that avenue to ensure you pursue worthwhile investments.

Author: Liz Brumer-Smith

Source: Fool: The Best Way to Invest in Real Estate Right Now

Do you know how to find profitable real estate investments regardless of the real estate cycle? There is always an opportunity, it’s simply a matter of understanding what investment opportunities lie in the current market.

I started my first semester of college in 2008. While I was blissfully enjoying university life, the U.S. economy was experiencing one of the worst recessions our country has ever seen. Approximately 8.7 million jobs were lost between 2007 and 2010.

Mortgage delinquencies were skyrocketing, foreclosures were happening at an alarming rate, and investment and retirement accounts had been drained. While I am thankful to have not been personally affected by the downtown, it was a rude awakening as to what could happen, and likely will happen again in the future.

Understanding how our economy works on a macro and micro level means you can identify potential triggers, make informed decisions to increase profitability and mitigate risk, while still finding profitable investments regardless of where we are in the market cycle.

To help you stay ahead of the curve and find profitable investments — regardless of the real estate cycle — we’ll explain how real estate cycles work and discuss some of the ways to seize opportunities for investing in real estate in those specific periods of the cycle.

Phase I: Recovery

The recovery phase is the first stage after a recession or pullback in the market. In this phase, there is a low demand for housing and high vacancy rates. This is a great time to purchase properties as the price of real estate is low. This can initially be a hard phase to identify, as it often still feels like a recession. However, if timed well, there are a lot of opportunities to buy real estate at rock-bottom prices. If we think back to our most recent cycle (The Great Recession), this recovery period likely fell around 2010-2015.


  • Home sales and leasing are flat. Over time, there is slow upward growth for both rentals and property sales.
  • Very little new construction is being built.
    Interest rates tend to be either declining from rate cuts or holding steady at low rates.
  • Emotions are often fear, panic, and depression. Eventually, over a period of several years, as the market slowly recovers, emotions become more positive and hopeful.


  • Typically low-interest rates. This is normally a great time to borrow on new real estate acquisitions or refinance a property you may already own. If you can get a lower interest rate and shorter term, you can eliminate your debt at a faster rate. However, bank lending is often restricted post-recession and bank financing may not be an option. For that reason having liquidity means you will have funds available to buy investments during this period.
  • Buying properties below value. This is a great market to find value-add properties that you can sell for top dollar in the next real estate market cycle, or hold for long-term cash flow.
  • Having liquidity is the number one way to take advantage of this cycle. Without the available cash to invest, you could be sitting on the sidelines when price and opportunity are at their best.
    The sooner you can identify the recovery period, the better!


  • While there are always risks in any investment and any market, when a market is recovering from a recession, the purchasing risk is greatly mitigated because prices tend to be at a deep discount. Always conduct thorough due diligence on each asset you acquire — and don’t buy an investment just because prices are low, make sure the numbers actually work.
  • Vacancy rates are typically high and rental rates are often low in this period. If you already own assets, this could mean you have to hold on to an asset longer than anticipated. Having liquid cash can keep you from going under during this time as you wait for the market to recover.

Phase 2: Expansion

The expansion phase is when the market is showing signs of recovery, growth, and expansion. GDP has stabilized back to normal levels, job growth is steady, housing is in a balanced supply and demand, rental rates are increasing, and new construction ramps up again. Confidence is being rebuilt in the economy and spending across the board begins to accelerate. Investor activity is typically high at this time.


  • Home sales and leasing have increased greatly. There is a balanced or high demand for housing, and prices for both rentals and houses are rapidly rising.
  • New construction begins again and there is flipping activity in the single-family market.
  • A stable or modestly increasing interest rate environment.
  • GDP returns to ideal, “healthy” levels, around 2% – 3%.
  • Emotions tend to steer toward optimism, confidence, and excitement.


  • Interest rates remain low and lending criteria may start to loosen, although bank loans may still be difficult to acquire. Since housing prices have also increased, this can be a great time to refinance and capture equity you gained through your value-add. Then you could use those gains to invest in other properties that could similarly benefit from a value-add strategy.
  • Strong opportunities for new development, re-development, or acquiring value-add investment properties.


  • Higher chance of overextending with leverage. Make sure you are not incurring too much debt. If the goal is to hold long term, you should be confident the property will remain profitable throughout future cycles.
  • When the economy looks and feels recovered and is in a stage of growth, prices are typically on the higher end of the cycle. Investments that are predicated largely on price appreciation could be in trouble.

Phase 3: Hyper supply

In the hyper supply phase, we see a tipping point from a balanced supply and demand to oversupply. There are more houses for sale than the market demands, which causes prices to slowly lower. Construction slows as market inventory remains high and rental rates remain high while demand decreases, although we often see new construction continue through a hyper supply market. Job growth, GDP, and interest rates remain stable. Prices typically peak in this phase, just before the tipping point where we enter a market decline.


  • There is an oversupply of housing, meaning supply exceeds demand which causes prices to lower. This can happen on a micro level, in just one market, or at a macro level.
  • Rental rates remain high, but demand for rental housing decreases.
  • GDP, job growth, and interest rates remain stable.
  • Emotions tend to reflect overconfidence in what the market is delivering and believe the high prices, rental rates, and growth will only continue. Eventually, as indicators become too strong to ignore, emotions shift to anxiety, fear, and possibly denial.


  • Selling your assets, capturing any forced equity you may have gained. Prices will peak in this phase, and timing the market will almost never be perfect. If you can get a fair but higher price for your asset, you should likely sell.
  • Great opportunity to buy a fully stabilized asset that can provide long-term positive cash flow, and can hold you over until the next recession and recovery phase.


  • Trying to time the market perfectly. Many people feel the decline of the market is coming and will sell their assets too soon. This means they leave money on the table that may sit idle for many months or possibly years before the next recession. Another error of trying to time the market perfectly is waiting too long to sell — believing prices aren’t at the peak yet. If you wait too long and the market starts to decline, it’s often hard to cut the cord on your losses and you end up selling in panic during a recession.
  • Overconfidence and not heeding the warning signs. Most savvy investors are getting out of the market or investing in stable assets that will carry them through the next downturn. This typically is the worst time to buy, as prices are at their peak.
  • Continuing to build new construction when demand is slowly decreasing. This contributes to the oversupplied market and can end up in disaster for the investor.

Phase 4: Recession

The recession phase is the result of over-inflated growth. We enter a declining market where prices, jobs, rental demand, and new construction plummet. Default rates on mortgages, loans, and credit cards increase. Businesses close, unemployment rises, and foreclosures increase. We will eventually hit rock bottom for this cycle, where prices for real estate will be at their lowest.


  • Housing prices and rental rates decrease rapidly as housing demand is reduced and supply is increased.
  • Unemployment rates and defaults increase. Many businesses shut down.
  • Spending halts as people try to save what they can in a moment of panic.


  • This is when pricing will likely be the best. If you are liquid and have available capital you could have the
  • opportunity to purchase properties at extremely deep discounts. This is the cycle where people can change their financial circumstances.
  • The biggest opportunities are in value-add. Buying non-performing mortgages, REOs, short sales, or other types of distressed sales.


  • Not having enough capital reserves or liquidity. When a homeowner or investor sells real estate during a
  • recession at rock-bottom prices, it’s typically because they need money. They did not have enough capital
  • reserves, stable assets, or liquidity to ride through the economic downturn.

Can you really time the market?

There is always a debate where we are exactly in the cycle at any given time. The economists at Epoch Times believe the cycles change on average every 18 years, with mid-stage mini-recessions about halfway through the cycle. The interferences of World War I and II are the exceptions. Although it’s important to note their sample size is small from a statistical analysis.

Some say trying to time the market is a lost cause. “Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections than has been lost in corrections themselves,” goes the famous quote by Peter Lynch.

While others say that there you can time the market with certain indicators. Even if you learn the cycles, keep an eye on indicators, and feel you have a firm understanding of where we are in the cycle at the given moment — applying the theory of market cycles to the actual market is much harder than it seems. In fact, timing the market is extremely difficult. It’s less about timing the market perfectly, and more about being as informed as possible.

Author: Liz Brumer-Smith

Source: Fool: Understanding Real Estate Cycles to Find Profitable Investments in Any Market

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