When I was a teenager my parents handed me a copy of a book called The Wealthy Barber. The book itself was not earth shattering by any means, but it introduced me to a concept that forever changed my life.
That concept was the power of compound interest, which Albert Einstein once called "the eighth wonder of the world."
I decided that I would let the power of compound interest work for me through two different types of investments. I directed half of my savings towards stocks and half towards real estate.
Now, twenty years later I’m still very grateful that my parents handed me that book at a young age. But if I could go back in time, there is something I would change significantly.
I would significantly decrease the amount of money that I invested in stocks, and significantly increase the amount that I invested in real estate. With the benefit of twenty years of hindsight, I’ve come to the conclusion that real estate is the much better way to generate wealth.
I’m not talking about investing in real estate with the plan to flip a property at a high price within a year. I’m talking about disciplined, long term real estate investing that can create staggering amounts of wealth if you are patient.
I believe real estate investing has many advantages over investing in equities. The real key advantages are:
-- Real estate is extremely tax efficient
-- You can safely borrow against real estate which allows you to employ the power of leverage (borrowing against stocks is crazy, in my opinion)
-- As an individual you can add value to a property and thereby influence the success of the investment
-- You sleep well at night owning something that doesn’t fluctuate in price every second of the trading day and generally speaking goes up in value over time.
All of these advantages combine to result in investment returns from real estate being significantly higher, under many circumstances, than in stocks.
While it is very hard to average 10% per year in the stock market, I don’t believe it's hard to do quite a bit better than that in real estate by using a sensible amount of leverage.
So why then, despite all of these benefits do most people not own real estate outside of their primary residence?
The simple answer is that real estate as an investment can come with a significant “pain in the butt” factor. You can’t just buy real estate and do nothing until you want to sell it. As the landlord you have to deal with tenants, maintenance and all kinds of headaches.
Or do you?
I recently came across a website called Realtymogul.com that offers a passive alternative to real estate investing. What Realty Mogul does is allow investors to pool money together to buy shares of carefully selected real estate properties.
You may be thinking that Realty Mogul is a REIT (Real Estate Investment Trust). It's not. It's not even a stock that you can buy on the major markets. Instead, it's a company that invests in properties based on a "crowdsourcing" model.
In short, Realty Mogul allows investors to pool their money to buy property (somewhat like a REIT). What's more interesting, though, is that you select the specific properties you want to invest in. Conversely, if you own a REIT, you are at the mercy of the executives running the company to select all of the real estate investments for you.
Through the use of the Realty Mogul crowdsourcing web platform, investors can browse and screen potential real estate investments. The investor picks and chooses which property to own a piece of.
An investor could, through Realty Mogul, even focus exclusively on properties that are in his own city where the investor knows the market, the property, and has a real edge in property selection.
As they say, location, location, location...
Like a REIT, Realty Mogul allows the investor to not get his hands dirty. Each real estate investment is tied to a professional real estate company that deals with the hassles of things like leaky toilets, unruly tenants and trash.
Realty Mogul opportunities are generally focused on properties with existing cash-flow, like apartment buildings, office buildings, retail shopping centers, self-storage facilities and pools of single family homes.
Investors are entitled to a share of the cash-flow from rent as well as the proceeds from the eventual sale of the property. The average holding period for an investment is 3 to 7 years. As an investor you own a share in an LLC that owns the property.
How do the properties get on the Realty Mogul site?
Real estate companies request permission to list their investment opportunities in the Realty Mogul marketplace by joining Realty Mogul as a private real estate company and submitting an application. The Realty Mogul team along with their broker-dealer partner reviews their materials and determines whether the company and the investment are a good fit.
Realty Mogul claims that only 5% of submitted properties are accepted, which would suggest that any unsavory characters or unattractive properties are screened out.
There are obvious benefits to what Realty Mogul is offering.
As an investor you don’t have to deal with the hassles of real estate ownership, yet you can still choose to only invest in properties that are in markets that you know. Also, the amount you choose to invest can also be relatively small (as little as $5,000) -- where if you own a property yourself, you are going to have to come up with considerably more dough.
But there are several things about this “crowdsourcing” model to be very cautious about.
The biggest one is that as an investor I have no control once I make my initial investment. That money is tied up until the management team in charge of the LLC decides it is time to sell. Like physical real estate that you own, an investment through Realty Mogul is relatively illiquid.
That makes me a wee bit uneasy.
This model also eliminates much of the tax benefits that owning real estate directly provides. As a real estate owner I can choose to withdraw capital by adding some leverage to the property rather than selling. That allows me to defer tax consequences by decades if I want to.
For me, I want full control of my real estate investments. I also want to be able to use a sensible amount of financing against my real estate assets.
Yes, that means that sometimes I have to turn the other cheek and take some abuse from a belligerent tenant, but I can handle that.
For others who don’t want to deal with any of the “pain in the butt” factor that real estate brings, Realty Mogul, or one of the other burgeoning companies in this space, might offer an interesting way to get some exposure to the rewarding world of real estate investing.
Action to Take --> I'm not saying to go out and invest in property through Realty Mogul on a whim. But if you are interested in real estate investing, this is an infant market that is just getting going and one you should know about. Any investments in this space should be done with the utmost caution, but it may be worth exploring.