Alternative ways to Invest in Real Estate

You don’t have to buy big real estate deals to invest in them.

The market is recovering and you should get back in. Don’t believe we are in recovery? You should.

Here are the key economic indicators that tell us the trend is UP:

1. Pending Home Sales UP

2. Housing Starts UP

3. New and Existing Home Sales UP

4. Housing Inventory DOWN

5. Housing affordability UP

6. Mortgage Applications UP

7. Mortgage interest Rates DOWN


• Builders lot inventory is depleted

• There is a six months minimum wait for new homes

• Builders have announced price increases

• Incentives are gone

• National Builders inventory is down to six months.

• Commercial lending is easing up

• Empty strip and shopping centers are filling

Ok. By now you should totally be “getting it”. The real estate market is hot again. But you don’t have the time, energy to start investing again. So what do you do to participate in this return of the hot market, short of buying real estate?

The most popular way is to invest in Real Estate Investment Trusts (REITs). I have some of my portfolio in REITs (my largest position is in RSO) and I frankly have done well in REITS over the last five years. Not very exciting however, and no control what so ever. I look at my investment in REITS as my conservative, “don’t watch it much” money.

If you want more involvement in large deals but don’t want to do the work, consider buying with partners, joint venturing, or becoming an equity partner with a trusted active real estate group.

There are a few entry points for you in what is called the “Capital Stack” of real estate investment deals, some with little or no risk, and some with very high risk.

1. Pursuit Capital. You can be a participant in the equity or deposit portion of an investment before the deposits go hard. There are two classes of money needed by the operators here:

a. Soft money. This is money that is used for deposits. Operators generally pay three points up front for this money and a point per month. The deposits are callable by the buyer (your partner) until the contract goes hard. So there is very low risk. Investments are normally $50,000 to $100,000 or more.

b. Hard Money. You as the investor actually participate in the hard costs of due diligence during the soft money period. You are offered a percentage of the operators share for taking this high risk. $100,000 could be lost – or be worth ten times. This is money that is spent whether or not the operator buys the investment. If it is spent and the deal is not executed, you are offered a “claw back” – which is the ability to be the first out on the next deal. This money is used for engineering, legal, and architects or land planers during the due diligence.

2. Equity. Once the deal exits due diligence successfully and goes “Hard,” the deposit money is non-refundable and is either replaced by an equity investor or the soft money investor BECOMES the equity investor (his choice). Generally the equity investor is offered a preferential rate (Say 8%) and this is called a PREF. He then participates in what is called a waterfall, A waterfall is a percentage of the return that is realized after the PREF is paid. For example, let’s say a shopping center deal returns 23% per year over 5 years. The Equity partner gets 8% PREF, then the 15% is left and that is split between the equity partner and the operator or general partner. If the agreed upon split is 50/50 the equity partner gets 15 ½ % (8 PREF plus 7 ½ Waterfall) and the general partner gets 7 ½%

3. Debt. The debt is generally picked up by large banks or institutions, but for smaller deals the equity partners may decide to be the lender as well.

If you do decide that you want to participate in JV’s, syndicates, or become involved in an operators capital stack, there are several risk/reward scenarios to choose from based on several factors:

· Level of Financial Commitment

· Yield Objectives

· Risk Tolerance

· Product Type

· Geographic Comfort Zone

· Desired Time Horizon

Work only with legal representation and make certain your general partner is qualified, has a stellar reputation, and will keep you involved as much as you want to be involved.

Please contact me if you would like to be introduced to some of the opportunities that I look at.

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