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By: Kevin French
Have you ever thought of being a Real Estate investor but the thought of all that work soured you on the whole idea? If the thought of swinging a hammer all day makes you quiver or just sick inside, I’m writing this for you. Have you heard of ordinary people making killer investments in various Real Estate funds? If you haven’t, you are not alone. This article will discuss the top Real Estate investment funds available to you for your benefit. You’ll understand how they work and, depending on your tolerance for risk, which will be best for you to consider.
Okay, when most Real Estate investors think of funds, aside from raising funds to purchase investment properties, they typically think of the stock market. They might think of Exchange-Traded Funds (ETFs) or Mutual Funds. Generally speaking, ETFs might also track a particular index. They can also follow various sectors, like Real Estate, for example, and they can be purchased or sold in a stock brokerage account the same way regular stocks can. Various Mutual Funds hold one or more Real Estate Investment Trusts (REITs) in their portfolios; we’ll address REITs next.
Real Estate Investment Trusts, frequently abbreviated as REITs, come in various flavors or categories. A REIT, as defined, is a company that owns and manages real estate properties. They often develop those properties with the express intent of producing an income. In my estimation, as REITs come in various categories, an intelligent investor can decide what best investments to make. These categories include apartment complexes, shopping centers, strip malls, health care, factory outlets, college housing, lodging, industrial complexes, mortgage and banking, office spaces, etc. As an added benefit, by law, REITs must disburse at least 90 percent of their taxable income yearly to shareholders by paying them dividends.
Exchange-Traded Funds (ETFs), Mutual Funds, REITs, and Real Estate focused stocks, for that matter, are only part of the equation. Although these financial instruments can perform very well and even have excellent results, much more is available that might get overlooked without doing some digging. Call on brokers like Robinhood or E*Trade and tell them you’re looking for a high-yielding Real Estate fund, and they will most likely start showing you performance stats on their favorite ETFs and REITs. Then, run a search on the internet, and you’ll begin to get the picture. I didn’t mention bonds and funds comprised of bonds, but they are also out there. The bottom line is that these instruments can be great investments for you, but you need to keep it all in perspective and do your due diligence to find out what is best for you. What is best in your current economy? What’s best for the industries represented in a Real Estate Investment Trust you are considering?
Here is an example of what I know regarding REITs. Know the industries you want to get involved with and understand the timing. For instance, all lodging or travel investments were in a downward spiral during the pandemic. Also, understanding timing is everything; the time to look at these sectors was when we began digging ourselves out of the issues from 2020 to early 2021, then you could have picked up some good companies at bargain-basement prices. However, one sector that didn’t seem to get walloped during that same time frame was apartment complexes. My logic tells me no matter what is happening in the world; people still need somewhere to live and lay their heads at night.
Investment Funds that are difficult, if not impossible, for the average investor to get into are high-value securities reserved for “Accredited Investors.” The Security and Exchange Commission (SEC) has, by law, deemed some investments too risky for the average investor, and they are only available to “Accredited Investors.” see qualifications below. These securities include Venture Capital funds, Hedge funds, Angel investing, and Crowdfunding, among others, including investment vehicles.
These types of investments are commonly pooled investments, meaning your investment is combined with other investors’ resources and typically generates much loftier Returns on Investment or ROI. However, by SEC regulations, you have some pretty high standards to become an accredited investor and qualify for such great returns (and don’t forget there can always be significant losses, too).
According to a www.forbes.com/advisor/ article, updated Mar 15, 2022, to be considered accredited, the Securities and Exchange Commission (SEC) says you must meet one of the following three requirements:
If you would still like to invest your money outside the standard vehicles available and don’t qualify as an Accredited Investor, don’t give up; there is hope for you. Alternative ways of investing your money are available and similar to the high-end route.
Two of my favorite have excellent track records and very different “buy-ins” for getting started. Both are available to Accredited & Non-Accredited Investors to invest in, and they are NOT a REIT or Stock. The first one has a minimum contribution amount of $1000.00 to get started. There is a monthly payouts with the opportunity to roll your payout back into the fund. Your minimum tie-up period is 12 months. The other only requires a contribution of as little as $10 for a beginner’s portfolio. These types of investing should be viewed as longer-term strategies when getting involved.
Private Equity Funds have features that include fully audited funds, which are frequently open to Taxable and Non-Taxable Accounts, and their Preferred Rate equals 6%, but often can be higher. Funds like this arose to provide participating investors with similar benefits offered to accredited investors through High Yield Private Equity Funds — a real estate-focused investment opportunity through private money notes and carefully chosen real estate projects.
Companies and their officers who specialize in the origination of real estate notes for investors typically oversee funds like these, focusing on real estate fund management, loan servicing, and the education of real estate investors. If these officers and their companies don’t perform well enough, they are not getting any interest income, so it is in their best interest to manage these funds to the best of their ability. In the meantime, their investors are still collecting their Preferred Rate regardless. There are other similar funds to these with higher contribution amounts and returns on investment. This one is interesting because it feels like a Venture Capital or Angel investor-type investment, but the $1000.00 contribution is way more affordable.
The other one of my favorites is a company called Fundrise. Fundrise is a Real Estate Crowdfunding type platform. With Fundrise, investments of as little as $10 will get you started. Their asset-driven investments are the engine for your return potential. They have an extensive network for acquiring assets from residential to commercial properties. In addition, they use a value-investing model that pushes to amass units for much less than the current market value and generally less than their replacement costs. Finally, they have a winning game plan by teaming this up with the collective buying power of their member investor community. Yes, your invested money gets spread over many projects along with money invested by other community members.
The Fundrise team then works to increase the value of each asset over time through an active and direct management style and partnering with local operators. Using a conservative approach, Fundrise has built its portfolio to withstand prolonged periods of economic distress. In their own words, “they feel they are in a position to be able to sustain a severe economic downturn.” Although there are no guarantees, as is true for any investment, their client’s returns speak for themselves.
In Q1 2022, when REITs reported a -5.27% return on investment and the S&P 500 reported a negative -4.60%, Fundrise reported a positive 3.49% ROI. Looking at the year we just came out of, that’s more than what my personal 401K could muster. But, remember earlier, and I said perspective and due diligence are everything. Look at what the economy around you is doing, and read and interpret the trends in the market. If suddenly people stop sending their kids to college, I would get out of my college housing REITs and look for something else that’s trending.
Note: If you’d like more info on how to get started investing through Fundrise for as little as $10, send me a message, and I will send you coupons that will give you $25 in shares just for signing up.
Another hands-off approach is investing in real estate through purchasing trust deeds or notes. Trust Deeds, also known as Notes, allow investors to take a stake in a piece of property without getting their hands dirty. Instead, an investor can purchase the trust deed of the property and hold it in exchange for paying off that debt. This different way of generating investment dollars allows Real Estate Fix and Flip investors a way of collateralizing that hard asset to obtain a new loan and finish their project.
The holder of the trust deed can then become a resource to the Real Estate investor and maintain the security of their resources by taking a lien position on the investment property.
Differences Between Mortgages and Trust Deeds
People tend to think of property loans simply as a mortgage because most people familiar with buying properties use mortgages to acquire the loan to make the purchase. But there are differences in what constitutes a property loan from each state’s perspective
Mortgage
What makes up a mortgage? Each typically has two parts. First, the promise to pay the funds back to the lender refers to the promissory note. The lender will detail the specifics of the loan and the borrower’s payment terms, called the “Trust Deed.” The lender should record the deed immediately in the county where the property resides, creating the lien position. Depending on which state, the lender can generate the lien by either the mortgage or the trust deed.
What does that do for the lender? First, it gives them authority to recover their funds by foreclosing on the property if or when the borrower defaults on the terms of the loan, exercising their legal claim on the property. Notice that the lender wants to be in the first position; this allows them to recover their investment above any other liens if the borrower defaults or any other actions occur against the borrower.
First Trust Deed
Two parties are involved with a mortgage, the lender and the borrower. But in states where trust deeds are the norm to secure a loan, three parties are involved. These consist of the following:
The Trustee’s function is to sell the property at auction in the case of foreclosure. Under a traditional mortgage, foreclosures for lending institutions like banks can be complex due to state laws. With Trust Deeds, a “trustee” facilitates the sale of the property at auction in the case of a foreclosure.
A first trust deed is often called a modern-day mortgage by many investors. The legal document gives the mortgage lender the legal right to foreclose on and sell your property if you default on the loan. The position is everything, as a first trust deed has priority over all other mortgages or trust deeds on the property.
Although a First Trust Deed is a very secure position, there is something to be aware of and always keep in the forefront of your mind. Property tax liens and mechanics liens have higher priority than a first trust deed in certain circumstances. Although other liens may not have higher priority, it doesn’t always mean they couldn’t affect your security interest in the property. Therefore, I always encourage readers interested in all types of investment vehicles to speak with a legal professional on the details you need to keep aware of before attempting to use any wealth-building strategies. I am not a licensed investment practitioner, and the information I share is avocational and intended for individuals’ enrichment, development, and enjoyment.
*Alternate Funding Solutions is a Private Money Lender offering creative financing solutions for real people looking to get on the road to home ownership and for real estate investors needing investment capital through Private Money Loans.
** Alternate Funding Solutions and any of its affiliates and/or employees are not registered investment advisors and, as such, do not hold themselves out to be. Accordingly, Alternate Funding Solutions does not render financial or investment advice. If you are seeking financial or investment advice, please consult a competent financial or investment advisor.
