Different Ways to Invest in Real Estate
Hi, it's Kris Benson. We're at module 2 and today we're going to be covering the different ways you can invest in real estate. So, there's a lot of terminology around passive investors, direct investors, syndication, crowdfunding and we're going to go over those just briefly so you have a good understanding of what each one means and what the potential benefits may be for you as an investor.
So, just as a quick precursor, in case you didn't watch the first video, my handwriting is awful so as it pops up on the screen, I'm going to have you - I'm going to apologize for that up front. So, we'll start today with what a direct real estate investor is and I'm going to draw you a little picture because I think it gives you a good understanding. Right? So, here's a house and you as the investor, are investing directly with your money into that house. You actually own the asset itself. And, the benefits of that are control, right?
So you own and can control the day-to-day operations of that real estate investment. You also reap the benefits of depreciation solely. So, you as an investor, take all of the paper losses the IRS allows for. And the downside is, you are in control. So, unless you hire a management company, all of the decisions are made by you. And essentially, it's up to you to make sure that you maximize the value of that investment. Now, the the biggest upside to direct investing is there is no middleman.
If you make money, you earn that money. If you lose money, then it comes directly out of your pocket. So, a lot of our investors make a decision between - do I want to be a direct investor or a passive investor? And we'll go through passive investor next. But I think the biggest thing with making a decision to be a direct investor, is the time spent in becoming a good direct investor. Just like anything, I subscribe to the 10,000-hour rule. It takes awhile to become an expert and I'm certainly learning every day and this is what I do each and every day. So, I just want to be thoughtful of, is that a path that you can follow, based on your current role, in your current job and those types of things.
From direct investment, let's take a look at a passive investor. So, we'll use the same diagram. We'll have a house and instead of you investing in the house, directly, as an investor. There's a company in between. What I would call, an operator. And let's use Reliant because that's who I work for. So, Reliants here. Reliant buys the house and we have a group of passive investors, over here, that essentially gives us the money to buy the house. Now, as an investor, you own a share in the entity that actually purchased the asset.
So, in our case, just to give you an example. We purchase most of our assets with an LLC. So you, as the passive investor, are a member of the LLC. And, the upsides to that are: you're working with a professional real estate company like Reliant. In our case, and most other professional operators, you want to make sure they have a significant track record, have been through economic ups and downs and understand how to manage the asset class that they're buying. And so, in this case, you're partnering with a real estate expert to buy and manage the property and hopefully drive the investment returns that were originally projected.
Now, the downside of being a passive investor is control. You're relying solely on Reliant to make all decisions for the property. Now, if you're busy - you have a busy day job. Maybe you're a physician, an attorney and your day-to-days are socked full of seeing patients or seeing clients, then this might be a good option because you don't have to worry about what's happening at the property. That's Reliant's job and that's how we earn our money in the deal. But, you're relying on us to make good decisions for you. So, I think the control piece is a big one and then also trust. You really have to trust the operator that you're working with because they essentially control the destiny of the investment.
So, upsides of being a passive investor - time. You're not spending much time other than the original due diligence on the actual property and perhaps with the operator that you're partnering with. But, the downsides are - the control really shifts to the real estate operator to ensure the success of the project. So, one thing that you may have seen recently or heard of is a syndication. Just a quick definition of a syndication.
A syndication essentially is, anything - one thing that one person can't buy so they split the cost across a group. So, my best example of a syndication is an airplane flight. So, I couldn't purchase too many private jets to fly me where I wanted to go because they're so expensive. So, it may cost me $30,000 to fly from New York to Orlando by myself, but if I have a group of 150 people with me, we split that cost across 150 people, now it becomes affordable for everybody. And in real estate, it's the same thing. Essentially we have a house that costs 10 million dollars and most of our investors can't afford to buy that house individually.
So, we pool a group together, or you can pool a group of investors together and we have multiple people buying the house. And so, each one of these investors becomes part of a syndication. And, there's a number of different ways that these are set up and we can potentially go through some of that in a future video. But, just to give you a high level - it's a group investment in one particular asset that you couldn't afford on your own. Now, what Reliant does, just to give you an example. We syndicate our individual self-storage properties in either an individual deal where we're buying one asset, or a fund.
Think of it like a mutual fund. If you're interested in learning more about the Reliant investment opportunities, you can click on the link below. That will take you to learn more about our most recent investment opportunity. And then, the last thing that I think has made a lot of press or a lot of noise in the last 5 years has been crowdfunding. And so, there's a number of these types of platforms out there. Platforms like: RealtyMogul, CrowdStreet, Fundrise. There's a number of them.
And, essentially all the crowdfunding platform is, it's an opportunity to connect the operator, so, a company like Reliant with investors that we don't know. And, how they do that is. Let's use CrowdStreet for an example. The crowdfunding platform essentially builds a huge web infrastructure to attract investors and they put some really nice educational content together so investors who are out googling "passive real estate investments", you'll come across these types of websites.
And so, the crowdfunding platforms partner with real estate operators like us and essentially everybody works together to gain access to the investment. And then you, as the investors, have access to the type of properties that we have. And I think there's advantages and disadvantages to crowdfunding. The big advantage, crowdfunding wise, is, you as an investor can go to one place and have access to multiple asset classes, different types of investment. So you may have self-storage, multifamily, office, retail - all different asset classes that you can access through one platform. I think the disadvantage to crowdfunding is - it's really challenging to get to know the operator because you're, sort of, held at arm's length from the actual operator itself.
In my experience in investing in syndications or crowdfunding - the key component is understanding who it is you've partnered with and to make sure that when things go wrong, they're going to act in your best interest. So, I think crowdfunding is a fantastic opportunity to see a ton of different types of real estate opportunities and create true diversification in your portfolio. OK, so that's all we have for today. In our next video, we're going to do a vocabulary lesson for a real estate investor so that you have the opportunity to evaluate some of the key terminology that you need to identify a good real estate investment versus a bad one. So, we'll see you in the next video.