Welcome to The Wealthy Mom MD Podcast—a podcast for women physicians who want to learn how to live a wealthy life. In this podcast, you will learn how to make money work for you, how you can have more of it, and learn the tools to empower you to live a life on purpose. Get ready to uplevel your money and your life. I'm your host, Dr. Bonnie Koo.
Hey there. Welcome to part two of real estate. In the previous episode, I gave you a brief overview about real estate: Why you should consider it, what the common objections are, what the benefits are, and how you actually make money in real estate. Today, I'm going to go a little bit deeper and go over the spectrum of passive to active real estate. Get into some more details, so I hope you're ready.
You can think of real estate investing in two ways, equity and debt. By understanding these two ways that you can invest in real estate, you'll be a much more informed investor. Basically, you either own real estate to varying degrees or you're lending money so that someone else can own the real estate.
Equity means that you are owning the property, at least to a varying degree, and we'll talk about that a bit later. This can take on many different forms. For example, in direct ownership, you actually own the property, and then you rent it out. This requires, I guess, the most work and you have the most control as well. Another example is investing in syndications, crowdfunding, or real estate investment trusts, also known as REITS. This is the passive side of real estate investing. When you do it in this way, you're basically owning a share of real estate, kind of like how index funds are owning a share of a stock. When you invest in real estate in this passive way, you basically get profit or grow money from the promised interest return, and then again, when the share of the profit is sold. There are many similarities or correlations between real estate and the stock market.
Let's talk about debt. If you're familiar with how bonds work, then you can think of debt investing in real estate as something similar to that. This is where you're lending money to another person or entity, so that they can buy real estate. As an investor in debt, you will basically typically receive monthly interest or quarterly interest payments. Now these interest rates can actually be quite high, especially compared to bonds. After a period of time, your capital is then returned. These interest rates can be as high as 10%. So the fact that the interest rate can be high and the fact that they're relatively simple and relatively secure because the debt is secured against an actual property, it can make debt investing actually quite powerful.
Now, I just want you to understand that the money you make from investing in real estate debt is often taxed or is taxed as ordinary income. Meaning that you're going to pay your marginal tax rate on it.
Now, you can invest inside of a tax advantage account inside a retirement account. Many of us think that you can only invest in stocks or index funds in our retirement accounts, but you actually can invest in real estate debt funds, syndications, et cetera, inside of a retirement account. This special type of account is called a self-directed retirement account. They generally come in two flavors. You have self directed IRAs, or individual retirement accounts, and you have self-directed 401ks. So if you choose to invest in things like that, real estate debt inside of it, then you'll shelter your taxes.
Now let's introduce the spectrum of passive to active real estate. I want you to think of two competing forces here. Passive means it's relatively passive to you as an investor, which means it's also the least amount of work on your part, the least amount of time. In return, you get the least amount of benefits and control. And then on the far end of the spectrum, you have active real estate, which means the most work, the most involvement, the most control, and the most benefits, including amazing, amazing tax benefits that are afforded to real estate professional status.
Direct ownership is when you own the home directly where you buy a rental property. This is the most active type of real estate investing. And this also comes with the most tax benefits because you really have control over real estate. And for some of you, that might scare you because you're worried that you might make the wrong move or that you'll make a mistake or you’ll have bad tenants, et cetera. I'm not going to sugar coat it. There are challenges and obstacles you will encounter when investing in direct ownership, but if you're up to the challenge, you'll also reap the amazing benefits as well.
I know many of you are interested in what we call passive real estate investing, but you still need to understand some basic terminology and do some education for yourself. The good news is all these terms are the same whether you do passive real estate investing or direct real estate investing. In fact, I'll say starting with passive is a great way to transition to direct ownership. Many real estate investors that I know own both passive and active real estate.
Even within direct ownership, there are ways that make it easier and sort of more done for you as the investor. So you may have heard the term turnkey real estate, and I think this means different things depending on who you're talking to. But turnkey real estate, at least the form that I'm talking about, is where you still own the property, but someone manages a lot of the work for you. You have a little bit less control, it's more hands off, but you still own the property.
But if you want to get even more passive than let's talk about syndications. What is a syndication? You may have heard that word a lot because that word is becoming more popular lately and there's a reason why. A law was passed not too long ago where syndications were allowed to “advertise” to the masses. Before that, they weren't allowed to. A syndication simply is where investors pool funds together to invest in various real estate projects. Think huge multimillion dollar projects that, on average, a single investor couldn't do themselves.
Many of you have heard about crowdfunding and real estate funds, and these are definitely the most passive types of real estate investing. And like I said, because they are the most passive, they also have the least tax benefits.
Hopefully, I've made real estate a bit more accessible to you and also helped you realize that it's not as hard as you think. You’ve got to start somewhere, so why not start now?
This episode is sponsored by Zero to Freedom, the free email mini course by Semi-Retired MD. Semi-Retired MD are doctors Letizia Alto and Kenji Asakura. They are the physicians who have achieved financial freedom by investing in direct real estate.
In this free video series, you will learn what you actually need to know to successfully invest in direct real estate. Go to wealthymommd.com/semiretiredmd to join their free video mini course.
So let's talk a bit more about the types of passive real estate investing. Specifically, I'm going to talk about crowdfunding, syndications, and REITs. I think earlier I said my first foray into real estate was through syndications, but it's actually through REITs and that's because if you own an index fund, chances are, you also own a REIT. They're usually folded inside some of the popular index funds, like VTSAX by Vanguard.
This is where a trust purchases property and rents the space, and then the income that's generated from the rental is returned to the shareholders. So if you are already familiar with how to buy index funds inside of your brokerage account or your retirement account, then while an REIT is very similar and it's super easy in that sense, you can buy an actual fund of REITs or usually it's folded in already inside of some of the larger popular index funds. So you can buy these through Vanguard, Fidelity, et cetera.
Now let's talk about crowdfunding. Many of us are familiar with this concept because we've all heard of things like Kickstarter. So you kind of have an idea of how crowdfunding real estate works. Crowdfunding real estate is fairly new, at least in a formal capacity. However, investors have been pooling funds for centuries. Crowdfunding is popular now because of the new-ish online platforms that have streamlined the crowdfunding process. In this way, you can bypass the parts of active real estate--meaning working with the agents and brokers and contractors-- and just go to a crowdfunding real estate website to invest in a variety of real estate projects. You still want you to do your due diligence, however, meaning you need to understand the terms and how to read if it's a good deal or not. And real estate crowdfunding can involve either debt or equity.
So let's talk about syndications. Syndications are somewhat similar to crowdfunding, but they are a little different. The same in that they both require pulling together funds from multiple investors. So basically, you're pulling money together to purchase a much larger real estate or project that you normally couldn't invest on your own. Think multimillion dollar deals. Think high rise apartment buildings, assisted living, self storage centers, et cetera. When you pull the money together, the expenses are shared and the risk is split. Oftentimes, crowdfunding and syndications are used interchangeably, but they're not exactly the same thing. I think the best way to think about the differences is that crowdfunding is focused more on obtaining large amounts of investors. Hence that's why it's an online platform. You rarely talk to anyone high up in the company. You usually talk to a low-level analyst. When I think syndications, I think of sort of a smaller type of shop where it's focused more on the relationships.
So that concludes our two-part series on giving you an overview of real estate. I hope I've made this topic a bit more accessible to you and be sure to tune into future episodes where we'll go even deeper into certain topics. Bye for now.
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