According to Andrew Carnegie, 90% of America's Millionaires achieved their status through investing in real estate.
Historically, investing in rental property has been one of the safest investment vehicles (owners of rental property did better than those that flipped houses or invested in stocks in the 2009 crash) that offer consistent returns.
But unlike investing in the stock market, real estate has typically had a high barrier to entry, as it requires significant time, knowledge, capital, and a network of contractors, agents, brokers, and lenders to do it successfully.
This has changed recently, as property investment companies are now offering consumers the ability to invest in individual rental properties, apartment complexes, and commercial buildings like office buildings and warehouses.
What is a Property Investment Company?
A property investment company is any entity that offers a way for its users to invest in real estate, without going through the conventional process of buying a home with an agent.
This could be anything from making it easy to buy rental property, to letting investors finance flips for other investors, or buying a share of a commercial warehouse or office building.
While the way you invest with these companies might vary, one thing remains constant: they do all of the work for you.
When property investment companies work as advertised, all you have to do is collect a check.
The Types of Properties Investment Companies
Real Estate Investing Platforms
Property investing platforms provide an easy way to purchase rental properties in other markets at scale. The largest company in this vertical is Roofstock, a platform that lets its users buy single-family rental properties and small multi-family apartments.
Roofstock sources investment properties, then runs the numbers to project their returns, and offers investors financing and property management. It seems like a great way to buy cash-flowing rental property without having to do any of the work yourself.
However, you should be careful with these types of platforms, as they are just selling the properties and collecting a fee, so they aren't as incentivized as you are to do due diligence on their investments.
Real Estate Funds
Real estate funds offer a truly passive way to invest in real estate. When you invest in a fund, you're really investing in the fund's manager, who will be responsible for all of the investments and decisions the fund makes.
Funds can invest in any kind of real estate, and their fee structure can vary wildly — although generally, the fund manager takes a management fee of 2% of all invested capital and offers a preferred return to the investors. Then the fund manager and investors split all of the returns above that number.
Publicly Traded REITS
If you want to invest in real estate, but still want the liquidity of investing in the stock market, publicly traded REITs (real estate investment trusts) might be your best bet.
These investments are often traded on big stock exchanges like the NYSE and can usually be bought and sold daily when the market is open.
There are REITs for everything from single-family rentals to commercial real estate, and shares can be purchased for less than $10.
While you don't have any say on the action of the fund, if you do your research, the liquidity and dividends can make investing in REITS a great, low-risk option.
The Types of Properties You Can Buy
One of the biggest advantages of investing through a property investment company is the ability to choose from pretty much any type of real estate you can think of. You can invest in:
- Single-family rentals
- Small apartments
- Large apartments
- Flipping houses
- Hard-money loans for other investors
- Commercial office space
Depending on your financial goals, some platforms are focused on long-term appreciations, while others are aimed at short-term returns, and finally, some offer slow appreciation with quarterly dividends.
Choosing a Property Investment Company
If you're thinking of investing in real estate with one of these companies, who you choose to work with ultimately dictates the quality of your investment.
While it might be appealing to choose the company with the best website, it's important to do your homework and make the most informed decision that you can. Trust me, your bank account will thank you later.
Experience is Important
When it comes to investing, experience is everything. I made tons of mistakes on my first several investments that I wouldn't dream of making now. If you're investing in a fund where the manager is new, you're more likely going to fund their education than get a good return.
Spend the majority of your diligence researching the operators of the company you're investing with, and ask to speak with past investors to learn about their experiences and outcomes.
Your Goals Have to Match the Company's Goals
If you want a 15% cash on cash return, and the company you're looking at only advertises 10%, then you should probably pick a different company. This is also true if a company mainly focuses on one asset class, but has a small offering of another that you're more interested in. You should invest where a company is strong, and not for a new area they're exploring.
Property Management Matters
Some property investment companies don't manage properties at all.
For example, if you buy a multi-family rental property, they will help you buy then renovate it for you as well. They don't manage the property, meaning you'll have to search for tenants, take care of paperwork, and do all the rest of the work.
If you're new to real estate investing, it may be a good idea to hire a company that also manages your property for you. If you're hiring a company that also does management, you should review the management company with as much, or more diligence than the actual property you're purchasing.
Management companies have a wide range of fees and performance, and you are trusting them to maintain an incredibly expensive asset. You also have no real visibility into the rent they collect, so the relationship has a huge component of trust.
You can lose thousands of dollars in rent and end up with a damaged property with poorly screened tenants if you don't do your homework, so always make sure to seriously vet your manager!
Don't Forget the Company Fees
Thanks to the way real estate deals work, there's no standard price that a company charges. Suffice it to say, depending on your requirements, there's always room for negotiation.
However, the point to note is that fees vary from company to company. Factor in these fees before committing to a property investment company. While looking for the best deal can be a great strategy, rock-bottom prices might come with hidden fees or risk.
Risks To Consider
My biggest concern with any property management company is making sure that incentives are aligned.
If a property management company is offering turnkey rental properties, they have an incentive to cut corners on the renovations then sell for the highest price they possibly can.
This leaves the investor with an overpriced property — and a future riddled with high maintenance bills.
This can also be the case for big funds where the manager is able to collect a 2% management fee, then invest in average properties. This would generate a subpar return for the investors, but a great return for the manager.
Personally, I've chosen to invest in property myself, as I like the feeling of control that comes with choosing my own investments and doing diligence — but I'm also fortunate to live in a market where this is possible.
Traditional Investing or Property Investment Companies?
There's no doubt that property investment companies offer valuable services. However, they're not a good fit for everyone. This table below breaks down the pros and cons of working with an investment company vs doing it yourself.
|Feature||Investment Company||Doing It Yourself|
|Control of your investments||Minimal to no control||You choose where and what to invest in|
|Truly Passive||Can be 100% passive||Requires lots of time and energy|
|Potential for upside||Some upside, but generally capped at 15% or lower||Can experience huge upside — savvy investors can see returns over 20%|
|Market availability||You can invest with a company anywhere on the world||Not all markets are a good fit for cash flow investing, and you might be forced to look at other options|
There's no right answer when it comes to deciding whether to invest with a company or do it yourself. We encourage you to do your research to get all the facts and make a decision that works for you, so you're not surprised in the future.