This article is for the investor who wants to move into real estate, but they want a higher level of involvement than just buying shares in a REIT, Real Estate Investment Trust. You still do not want to buy and sell properties or work with contractors, but you would like to get a nice return on investment in a real estate investment environment. You also want short term turnover of your money to limit market risk.
Let's say that you're currently invested in stocks or bonds and your pre-tax return in in the low single digits. This isn't that bad considering the current interest rate environment, but after even nominal inflation, it really isn't exciting at all. You'd love to up that return by a few percent, and you would do a dance for double digits with acceptable risk.
The problem is that there aren't really any formal mechanisms in place to connect someone like you with a fix & flip investor or wholesaler who is knowledgeable in real estate and in need of funding. This lack of an established communication connection makes it tougher for those deserving of your funding from connecting with you and happily giving you the returns you want.
The best place in most local communities where an individual passive investor can connect directly with active wholesalers and fix & flip investors is in a real estate investment club. The thing to remember in the club situation is that there will be investors with varying levels of experience and success; or lack of it. This just means that you'll need to know your business and do your due diligence.
What is Level 2 Passive Investing?
So, you don't want to just buy REIT shares. You want to invest directly into properties in your area by partnering with active investors. You still want to be passive, just providing funding for their projects. We're not talking about long term rental investing in this case. We are interested in providing short term funding for fix & flip and wholesale investors.
The wholesale investor usually does no rehab on a home. They specialize in locating deep discount properties and flipping them to other investors. Those could be rental investors if the property is ready to rent, but more often they go to rehab or fix & flip investors.
The fix & flip investor is going to do repairs or major renovation to bring a home to livable condition. They then sell it to a rental property investor or sell it on the open market to a retail buyer.
Our passive role is to provide the money they need, which could be a time requirement of just days to months. A wholesale deal can even close both ends on the same day. So, as the money person, you can put funds to work for hours, days or weeks and get returns well above other traditional investments.
How Does it Work?
When you connect with one of these active investors, you really need to check their track record. If you want to take a gamble on a newer wholesaler or fix and flip investor, definitely do your research on the property, their buyer, and the time your money will be at risk. They should have a buyer or potential buyers lined up before you put up money to buy a property unless they're selling in the retail market. It is easier to work with investors selling to other investors, as they often have a standing relationship and offers to buy properties that meet their requirements.
Before you dish out money, you take out a note or lien against the property to cover your investment, and generally keep your involvement to 60% or less of the current value of the home. This gives you some room to sell it and get your money back if something goes wrong.
You charge whatever fees and interest charges you want within reason. They have to make a profit too you know. Professional transaction funding companies charge loan initiation fees, double digit interest rates on loans that are out for more than a day or so, and they also charge other fees. You should be able to achieve double digit returns on your invested money. Check transaction funding websites to see how they set their charges.
Do your homework to limit your risk, and you can turn your money over multiple times each year for some amazing ROI numbers.