| How to Earn Attractive Returns on Investment Property Without Being a Landlord
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07 Aug How to Earn Attractive Returns on Investment Property Without Being a Landlord

No talking with tenants.
No fixing toilets.
No haggling with property managers.
No paying property taxes.
No increasing insurance premiums.
No utility costs.
Sounds almost too good to be true.

But a growing number of informed investors are enjoying these benefits by taking a different approach to investing in real estate — and realizing superior returns.

As the Managing Partner of a private mortgage pool fund, a real estate broker, and a real estate investor, I am frequently asked to evaluate or locate real estate investments for stock market-focused investors who want to diversify their portfolios. Many of these well-intentioned investors are understandably concerned about the recent highs and volatile swings in the equity markets. They are looking to real estate for more secure, reliable returns or as a shelter to protect their investment. Our typical conversation goes as follows:

MeWhy do you want to invest in real estate?
ClientI’ve got to do something different. Real estate is something real, something I can touch, and will appreciate over time. I want to buy an investment property close to my home.
MeHave you analyzed the returns of owning property in your market? Have you ever dealt with tenants and toilets?

The reason I ask these questions is not because I’m opposed to owning real estate – in fact, quite the opposite. However, there are many more secure and passive strategies to earn attractive (often superior) returns in real estate without having your name on the title, paying property taxes, or taking tenant calls in the middle of the night. And one of the most attractive alternatives to being a landlord is becoming a private lender on real estate – either as a trust deed investor (one deal at a time) or through private mortgage pool investing.

As a private lender, you are in effect “the bank” and can set the terms, rules and security of your investment. You have “control” of the real estate without “ownership”. This provides both leverage over your investment when things go well and protection if things turn out poorly. And if structured correctly, real estate investments as a private lender should passively earn you 8-12% net annual returns on average — compare that with owning investment property!

So how do you decide whether to lend money on one specific property or invest in a mortgage pool fund?

There is not one simple answer as it depends on many factors including your personal risk/reward comfort level of investing, desired level of involvement, desired return or income stream, expertise in real estate and private lending, timeline of investment, etc. There are clearly pros and cons of each approach and everyone’s situation is unique. However, I believe one of the best ways to evaluate these two options is to access your personal situation and then analyze which approach is best for you should the best-case/worst-case scenario happen with your investment. This exercise will give you a good sense of not only which lending approach best fits your investment goals, but also how the risk/reward profile of private lending stacks up against your other investments.

I hope this topic opened up your mind and sparked your interest into the world of private lending. If you’re interested in learning more, I’ve written a follow-up piece to this article on the pros and cons of lending on individual deals versus investing in a mortgage pool fund. You can access it on our blog HERE so you can make the most informed decision about which approach is right for you.

If you’d like to discuss how best to use this information in your investments, please feel free to contact us at 626.788.9700 or click here.