In the August Issue
- Introduction to Real Estate Investing
- How Traditional Investment Vehicles Compare to Real Estate
- Financing Options for Single-Family Housing
- Seven Key Differences Between Individual Deals and Funds
Introduction to Real Estate Investing
Are you new to the investing space or are interested in investing your money beyond the stock market?
In this month’s newsletter, Introduction to Real Estate Investing, we will compare and contrast stock market benefits with real estate investing and how to enter the real estate space for non-professional investors. By the end, you’ll gain a deeper understanding of the basic entry points into real estate, how to finance your first investment, and how individual deals compare to investing in a fund.
With today’s stock market volatility, investors are seeking alternative options to diversify their portfolios. Real estate proves to be one of the most advantageous alternative asset classes due to the myriad of growth and income opportunities available. (Learn more about investing in the age of volatility)
How Traditional Investment Vehicles Compare to Real Estate
The stock market is one of the most common types of investment classes among investors today due to its familiarity and low barrier to entry. Wall Street has made mutual funds widely available to any investor looking to work their money, emphasizing the ease of entry even further.
While there is opportunity for success, stock market volatility is high in today’s age forcing investors to find alternative investment strategies to diversify their portfolio.
*Investor Tip: Diversification is the quintessential key to a successful investment portfolio. It’s important not to put ‘all your eggs in one basket’ so you money is protected if any one investment class hits a recession.
One investment class investors are seeking after today is real estate and for several reasons…
- High degree of leverage
- Cheap, long-term financing
- Depreciation of assets
- Strong cash flow year to year
- Mortgage amortization
Most investors are unaware that real estate has the same benefits as the stock market with even more opportunities for growth and income. For example, depreciation exists in both the stock market and real estate, but there are greater depreciation benefits in real estate like lowering your tax obligation each year.
So how does a dentist, doctor, or other professional enter the real estate space? Let’s explore some basic entry points to begin.
How to Enter the Real Estate Market
Like we mentioned before, there are a myriad of opportunities within the real estate space for investors to explore, but they are segmented into categories based on the type of investment. Here are three basic types of real estate investments to get started:
- Primary Residence
- Single-Family Home
- Commercial, Multi-family, and Self-Storage
The first and most basic entry point is buying a home– your primary residence and first investment. When buying a home, there are several tax benefits that accompany your investment like tax deductions for interest and paid real estate taxes. Not to mention, your mortgage payment every month is like an automatic investment.
Beyond your first investment, there are several opportunities in real estate to generate cash flow each year. The first and most common investment is in single-family residential housing. *It’s important to note that fourplexes (1-4 unit residences) are included in this category as well. This asset class is the easiest to enter with great financing options like Fannie Mae & Freddie Mac conventional mortgages.
The multi-family, commercial, and self-storage space offers even more profitable opportunities than single-family residency; however, the barrier to entry is much higher for these projects. The major difference is the amount of capital required to invest and the level of sophistication required to manage larger assets.
For the non-professional investor, single-family homes are the easiest markets to enter that provide economy of scale. These projects also offer opportunity for income and growth, depending on the location of the property.
*Investor Tip: Coastal properties are well-known to be invested in for growth opportunities while Middle America offers more opportunity for income projects.
Once you determine where you want to invest, the next step is getting the financing for your property. Since single-family housing has the lowest barrier to entry, we’ll focus on this segment within real estate.
How to Invest in Single-Family Housing
There are two common ways to invest in single-family homes: you can either be the lender or the buyer.
The more conservative option of the two is being a lender. It’s common for individuals to lend capital to other investors looking to fix and flip a property or refinance. *Note: Always do thorough research on the borrower’s financial history before lending money. Another way to lend money is to offer a loan from your self directed IRA capital (Learn more about how to invest with self-directed IRAs).
Entering the single-family market as an owner, on the other hand, requires more time and research, but comes along with specific benefits lending does not.
Financing Options for Property Owners
If you are looking to buy an investment property (outside of your primary residence), here are a few financing options to consider:
- Fannie Mae and Freddie Mac Conventional Mortgages
- VAs or FHA loans
- Low Documentation Loans
Fannie Mae and Freddie Mac conventional mortgages are low rate, high leverage loans that are fairly easy to obtain with the right financials. These mortgages are also known as high documentation loans because they require you to provide all your financials including personal financial statements, taxes, bank accounts, W-2s, etc.
Essentially, you’re proving you have the income, assets, and seasoned down payment money to buy the investment. A plus side to Fannie Mae and Freddie Mac mortgages is that you can have up to ten investment properties per person, meaning, you could have ten investment properties and your spouse could have ten more.
*Note: The ten investment properties include your primary residence, so in essence it’s your primary residence plus nine more properties.
If you already own several properties under Freddie Mae and Freddie Mac or are unable to get qualified for those mortgages, an alternative option is a low documentation investment loan. They cost a little more money than conventional loans but are readily available on both an individual property basis and portfolio basis.
It’s important to consider the pros and cons of investing in debt and understand the difference in loaning money versus investing in equity. As an owner, you have to deal with ‘tenants and toilets’ but you also enjoy the benefits of depreciation and loan amortization.
An Alternative, Passive Option for Investors
There is another option to consider beyond investing in individual deals and that is investing in a fund. Most funds invest in the type of asset classes listed above (single-family, multi-family, etc.) and have the capital raised to invest in larger projects with bigger returns.
*What is a fund? In short, a fund is a sum of money pooled together by various individuals for a specific purpose. The Tempo Opportunity Fund LLC, for example, functions as a mortgage pool, investing directly in trust deeds and mortgages.
When you invest in a fund, you enjoy the benefits of a diversified portfolio while also gaining exposure to various types of projects. It’s a passive way to invest your money without having to do the extensive research behind finding individual deals for your portfolio.
Inside Look: Individual Deals Vs. Investing in a Fund
There are several key differences between individual deals and funds that are important to consider before investing your money. Let’s get started:
- Personal Guarantee
- Liability Risk
- Personal Involvement
- Activity of Investments
- Amount of Capital
With individual deals, risk in concentrated in a single project, so when the market is good, your asset does well, but when the market is down, your investment is in trouble. Depending on the type of deal (single-family versus multi-family), the level of risk varies, but the concept remains that there is high volatility with a single asset. When you invest in a fund, volatility is lower due to diversification among assets.
Individual deals have low liquidity because your money is in the deal until you refinance or make a sale on your property. On the other hand, funds are very liquid because they reserve a certain amount of capital as liquid, so they are able to redeem your investment on a quarterly or monthly basis depending on the type of fund.
Depending on the type of mortgage for an individual deal, the bank may require a personal guarantee. If you get a Fannie Mae, Freddie Mac mortgage, you will be required to sign a personal guarantee. With funds, the opposite is true: you will never sign a personal guarantee. With the Tempo Opportunity Fund LLC, we either have no liability in the deal or we don’t invest.
There is a significant difference in liability risk between individual deals and funds. When you own a property with a Fannie Mae and Freddie Mac mortgage, you buy into the house with your personal name. (*They don’t offer loans through LLCs) It’s necessary in this case to have good insurance to protect yourself against damage or injury incurred by your tenants or commercial landlords on the property.
Funds have limited liability because they have the resources to invest through various vehicles like LLCs and subsidiaries that protect their investors from risk.
A popular investment right now in real estate are turnkey properties. You buy a home that is ‘ready-to-rent’ and in theory, you start receiving cash flow month to month. While this cash flow is considered passive, you still have to deal with repairs, approve repairs, pay mortgage payments, taxes, etc. It’s rarely zero involvement when you own individual assets. When you invest in a fund, the fund manager’s responsibility is to handle individual asset issues, relieving you of any involvement in the investment. It’s a true passive vehicle.
When you invest in individual deals, there will be gaps of time between sales or repaid loans when your funds are idle waiting for the next deal. Funds operate differently, however. Your money is always working in a fund because it is the fund manager’s responsibility to keep capital deployed. *Note: If there are gaps of time between deals, investors will still earn a preferred return.
When you find a deal (individually or with partners), it’s necessary to have the right amount of capital to seal the deal. If it’s a single-family residency, you need the capital for a down payment, but just enough capital so all of your money is working (not too much or too little). On the fund level, there is much more flexibility with the amount of capital you invest. There are options to invest your capital every quarter, reinvest distributions every quarter, redeem shares every quarter, and more.
It’s clear there are many opportunities to invest in real estate whether that be through individual deals or investing in funds. Each route has its benefits, so it’s important to do your research and determine which investment strategy will generate you high return on investment (ROI) and return on time (ROT).
The TF Management Group LLC is the fund manager for the Tempo Opportunity Fund LLC. Our fund is already finding and participating in the market’s best investments for our investors. If you would like to learn more about the Tempo Opportunity Fund LLC and how to invest, please contact us and we’ll be happy to talk with you and answer any questions you may have.
Thanks for reading,
CEO, TF Management Group LLC
This newsletter and its contents are not an attempt to sell securities, nor to sell anything at all, nor provide legal, nor tax accounting, nor any other advice. The presenter is a private lending and real estate fund management business, and the information represented herein are purely for educational purposes and represents the opinions of the presented. Prior to making any investment or legal decision you should seek professional opinions from a licensed attorney, and a financial advisor.
TF Management Group LLC (TFMG) is an investment fund management company that specializes in both short-term debt financing for real estate “fix and flip” projects, and long-term “value-add” equity deals.