These days, you can’t flip through your TV channels without seeing another show featuring people buying an investment property or a home to flip.
But if you don’t have a big budget, and don’t see a future as a landlord, there are still ways to invest and reap the rewards of real estate returns.
1. Private Mortgages (Target Annual Returns six per cent to 16 per cent)
The last number of years banks have become a lot stricter with loans. This has created an opportunity in the private space for investors to become lenders and take advantage of the security real estate offers.
Self-employed individuals, people who need to consolidate debt, and those who want to renovate can all make great borrowers.
If the borrower misses a payment, there is recourse available to get your capital back because you’ll be registered on title of the property. While you hope it never comes to that, it’s reassuring to know you have options if necessary.
2. Mortgage Funds (Target Annual Returns eight per cent to 12 per cent)
Where a private mortgage invests in one property, a mortgage fund allows you to invest in a pool of private mortgages. This enables you to diversify your holdings and spread risk.
As with any investment, there are certain funds that are better than others and offer different advantages. Because you usually aren’t on the title like you are in an individual private mortgage, the most important element in a mortgage fund is the team running it.
The team’s ability to underwrite high-quality loans and balance that with incoming capital is crucial to the success of the fund.
3. Private Equity Partnerships (Target Annual Returns 20-plus per cent)
The two previous examples are investments into the debt component of real estate. Because debts are registered on title, it can make them very secure. If the thought of making returns around 12 per cent doesn’t excite you, equity investments may be for you.
Essentially, you become a partner in a development project. Your capital may go towards land acquisition, soft marketing costs, working capital, and the like.
As a partner, you usually get paid out at the completion of the development in one lump sum, as opposed to the monthly payments private mortgages pay.
Private equity investments carry more risk than a mortgage, therefore offer greater returns. Each investment is only as good as the developer and project, so make sure to choose carefully.
4. Joint Venture Partnerships (Target Annual Returns 10 per cent to 20-plus per cent)
Joint ventures are ideal for someone who has capital and the ability to qualify for a mortgage, but doesn’t want to be hands-on in an investment.
It allows the person to become the money partner, while the other party is responsible for finding the opportunity and managing it from start to finish.
Most joint ventures that I have put together are split 50/50 — but there’s no established rule about it. You can do it whatever way you see being fair.
For example, I break down the ownership into 35 per cent for the down payment, 15 per cent for holding the mortgage, 15 per cent for finding the investment opportunity, and 35 per cent for managing it.
You’re forming a legally binding partnership with this person/group, so make sure you share similar vision and ethics with that party. It’s really easy to get caught up in the excitement of the deal and put this aside, but I almost guarantee it will become an issue later on if something unexpected happens.
Note: This article is designed to make you aware of different investment options out there. Everyone’s financial situation is different and investments should be tailored accordingly. Speak to a trusted professional and remember there’s no substitute for your own due diligence.