Real estate is timeless and people will always need a place to live, technology can not really change that. The U.S. has an under supply of affordable rental properties and more and more people are becoming renters. According to Zillow, multiple universities, and many other sources there are more people renting in the US today than in the past 50 years (roughly 37%).
Of our overall net worth (not just equity net worth) we have about 30% in real estate; in the assets listed below (not including home equity).
This post stems from an article Mr. 1500 wrote on the Investment Zen website in July of 2017. The four approaches listed below are awesome ways to invest in real estate without having multiple law suits against you, fixing toilets at 3:00 AM, or dealing with pissed off neighbors because the young professional you rented to is throwing bi-weekly bangers….
I am currently as of 2018 not a landlord. I plan on adding one or two single family rental properties down the road to increase cash flow, but for now here is how I make money in real estate without any headaches.
The acronym REIT stands for, “Real Estate Investment Trust.” I use the Vanguard exchange traded fund (ticker symbol: VNQ) inside of a Roth IRA, therefore I do not have to pay taxes on the quarterly dividends. The dividend yield is distributed quarterly and is around 4%. This REIT is a bucket of publicly traded companies who own all types of physical real estate.
On a 100,000 investment, with a yield of 4% you can generate a passive income of 4,000 dollars a year or approximately 350 dollars cash flow per month. Unlike rentals the check comes in by you not doing a thing, not time invested fixing up the home or dealing with late rent. You can then decide to reinvest the dividends or have them sent directly to your checking account. This rate of return is not counting appreciation of the fund only the distributions. REITs are required to distribute 90% of their earnings, which is wonderful news to investors looking for yield.
REITs are a wonderful inflation hedge, as real estate tends to appreciate over time. Below are all the different sectors of real estate I get exposure to by investing in this fund.
- Senior Living
- Hotels and Resorts
- Storage Companies
- Office Spaces
- Industrial Spaces
- Retail Spaces
- Real Estate Developers
Crowdfunding Real Estate
Real Estate Crowdfunding is a new idea that was made possible because by the jobs act of 2015.
Directly from the SEC website:
“Washington D.C., Oct. 30, 2015 —
The Securities and Exchange Commission today adopted final rules to permit companies to offer and sell securities through crowdfunding. The Commission also voted to propose amendments to existing Securities Act rules to facilitate intrastate and regional securities offerings. The new rules and proposed amendments are designed to assist smaller companies with capital formation and provide investors with additional protections. Crowdfunding is an evolving method of raising capital that has been used to raise funds through the Internet for a variety of projects. Title III of the JOBS Act created a federal exemption under the securities laws so that this type of funding method can be used to offer and sell securities.”
I invest with a crowdfunding company called Fundrise and have been since early 2017. Fundrise has created a portfolio of eREITs and eFUNDs to invest in commercial and residential real estate and is based out of Washington D.C. They offer debt and equity investments and have properties scattered all over the U.S. The minimum investment is 1,000 dollars and you do not have to be an accredited investor. An accredited investor is defined as an individual who makes 200k, married couple who makes 300k combined, or have 1 million dollars in net worth excluding equity in their primary residence.
I focus my investing with Fundrise on the Heartland eREIT. Capitalization rates on rentals in the Midwest are better than on the coastal US cities. The Heartland eREIT currently has 13 properties a majority of their focus is within states such as Arizona, Colorado, and Texas. There is a large demographic moving south to warmer climates and many of these big cities do not have inflated real estate prices yet. All states seeing a large number of people moving into them year after year. Below is an example of a multifamily property that Fundrise has in it’s portfolio. I can now invest in giant deals that I would never be able to participate in the upside or cash flow before.
Fundrise pays quarterly dividends and so far my return has been slightly over 10%. It will be interesting to see what happens in a down turn, but right now I am very bullish on the Heartland eREIT and plan on deploying a good amount of capital into it in the future.
Real Estate is the physical land and appurtenances including structures attached thereto. Legally defined, real estate includes land and all things that are a natural part of it (e.g. trees and mineral rights).
Investing in oil and gas is a type of real estate investing, mineral rights are considered real property. In the United States the direct ownership of mineral rights is a right that has generated a unbelievable amount of wealth and prosperity. Not to mention the monthly cash flow and tax benefits destroy residential property investing.
Investopedia defines mineral rights as. “the ownership rights of underground resources like oil, natural gas, gold, silver, copper, iron, or uranium.” These rights allow the landowner or investor to achieve a cash flow if one of this resources is developed into a producing asset.
Owners of surface rights often have the right to dig beneath the surface to construct foundations for buildings, or to install infrastructure like a septic tank. However, surface rights holders who do not own mineral rights beneath their land do not have the right to exploit any valuable resources therein.
In this post I want to focus on mineral rights in relation to direct participation of development and exploring for oil and gas producing properties. One of my main duties as a petroleum geologist is helping oil and gas companies find hydrocarbons in an economic manner.
When Robert Kiyosaki, author of Rich Dad Poor Dad says he invests in oil and gas wells this is what he is talking about:
For this example we will call the company exploring for oil and gas FFrocks Oil.
1.) FFrocks Oil decides they want to drill an oil and gas well. They have geologists, engineers, and land professionals on staff or as consultants that decide where the well is going to be drilled based on hundreds of variables that we will not go into in this post. FFrocks Oil designates themselves as the operator, meaning they will handle the day to day operations of the well after it is drilled. Similar to real estate there are capital expenditures that come in on a daily and monthly basis.
2.) FFrocks Oil will then go and form a unit to establish how much land they will be draining. Multiple land owners can be involved or if there is a massive farm or property owner it could be only one landowner in the unit. For this example we will use only one land owner for simplicity. Also in this case Mr. Landowner owns 2,000 acres.
3.) The cost to drill the oil and gas well in this case will be one million dollars. The well will be a vertical hole drilled to 8,000 feet total vertical depth. FFrocks Oil at this point will go lease the mineral rights off Mr. Landowner and pay 100 per acre for the right to drill and produce his property for natural resources.
4.) At this point FFrocks Oil can drill the well with their own money, raise capital from private equity or wealthy individuals (usually accredited investors). Most of the time at smaller companies the employees who work there put their own money into drilling the wells.
5.) So drilling a well financial may look something like this:
1,000,000 well is funded 500,000 dollars by employee money and 500,000 by accredited outside investors. Lets say in this case alone that I personally own 2% of the revenue of the well. I am considered a non-op 2% working interest owner and I will be putting up 20,000 dollars into the deal to drill the well, also I will be responsible for 2% of the overall expenses of operating the well on a monthly basis.
6.) The tax benefits of drilling this well are amazing. The government is pumped your helping find energy for our nation!
Intangible Drilling Cost: expenditures of the rig workers, hiring people to clear land for the pad, land surveys that are conducted to drill, mud and water to drill the well, all things that have no salvage value are considered intangible drilling costs.
Tangible Drilling Cost Deduction: The investment allocated to the drilling equipment used is 100% tax deductible. Basically the equipment used to drill the well.
Depletion Allowance: A benefit that was implemented for smaller producers and direct investors. The 1990 Tax Act allows certain entities to exempt 15 percent of their gross income from federal taxes.
What does all this mean. It means that about 70% of the 1,000,000 well is tax deductible. So, if I invest 20,000 dollars I can deduct 14,000 to 15,000 dollars from my taxes in year one. A 70% return on investment in year one before that well even makes a dollar of revenue for me as an investor.
7.) Let us assume this well makes 100,000 BBLS of oil and 200,000 MCF of gas of a 20 year period that the well produces. I will receive monthly income checks for the lifetime of the well over that 20 year period.These numbers are very achievable and I have been in multiple wells that have produced numbers that are similar.
How did my investment do?!
Total Cost of Investment: 20,000, the other expenses through the wells lifetime 250,000, therefore my 2% would be 5,000. In today’s market place oil is roughly $70 a barrel (WTI price) and natural gas is roughly $3 an MCF (million cubic feet).
- Total Capital invested= 25,000
- Oil Revenue 100,000 BBLS of oil= $7,000,000
- Natural Gas Revenue 200,000 MCF=$600,000
- Remember as an investor I own 2% of the 7.6 million dollars in revenue over 20 years
- 2% of 7.6 million dollars is $152,000 in total revenue plus the $14,000
- 12.5% paid to the landowner of the total $152,000,
TOTAL REVENUE: $ 133,000 return on a $25,000 investment for a 5.32 return on investment!
The risk is that the well could be dry or that you could drill ten in a row with economics like the example listed above. Oil and gas investing is usually for accredited investors who participate with oil companies that have a direct participation program.
The other two ways to get involved are through private equity firms, or networking with people employed in the industry who are looking for investors.
*Above is a very basic example, please be careful with this type of investing. Have someone in the industry that knows what they are doing (Petroleum Engineer or Petroleum Geologist) screen deals before you jump in.
*Crowdfunding oil and gas companies are popping up like Crudefunders and EnergyFunders.
Other Types of Real Estate Investing I have experimented with:
- Real Estate partnerships/syndication investing in other peoples properties
- Hard money lending for others peoples down payments and home renovations