Deep Pockets Not Required to Invest in Real Estate

By Jessica Spalding

It’s not the rich man’s game it’s made out to be, and might be one way to supplement your investment portfolio for the long term.

As demand for rental and multifamily real estate continues to climb in the Kansas City market, beginning investors should
not feel resigned to standing on the sidelines for fear their pockets are not deep enough to enter the game.  

The reality is that entrepreneurial investors do not need to be independently wealthy or have access to vast amounts of capital to dip their toe into real-estate investing.

Many billionaire real estate moguls, in fact, began as investors of average means with just an appetite for something more than paper investments such as stocks and bonds. Real estate is appealing to many because of its cash-flow opportunities, as well as the opportunity for increased equity and appreciation in property value, while also taking advantage of certain tax deductions throughout its life.

As it relates particularly to beginning investors, however, one of the more attractive qualities of real estate, which makes it unique from other types of investing, is the ability for an investor to create leverage by borrowing to purchase a property. This approach gives investors a way to capture returns and
raise capital while spending little out of their own pockets.

While borrowing certainly requires good credit and acceptance of a certain amount of risk, it is a commonly used option for minimizing the amount of capital nec-essary to get a start in real-estate investing.

Reviewing Your Options
As an alternative to borrowing from a bank, however, beginning real estate investors have another option: borrowing from their IRAs. Also known as non-recourse IRA self-directed loans, this lending option can be useful as long as the investor has sufficient funds in the IRA to make a non-leveraged investment in the property.

Regardless of which of these options an investor decides to use, entrepreneurial investors should establish a solid base of knowledge about the industry and market so that they can be confident in their selection of their first property. In addition, beginning investors will want to determine clear goals for
their investment whether they may be to create additional cash flow in their daily life or to retain a property for extra income in retirement. There are different investment strategies depending on the investor’s goal.

Besides the myth that an investor must be independently wealthy to enter the real-estate game, another common mis-perception about real estate is that the only way to make money is through the appreciation of the property.

The reality, however, is that there are several ways to earn income off of a real-estate investment, including:
• Passive cash flow. Depending on how it is structured, the investment can consistently provide revenue through passive cash flow throughout the life of the investment if it is a rental property.
• Principal pay-down. Although the investor is not realizing the cash flow in his or her pocket monthly or even yearly, that person is reducing his or her principal balance through the buyer’s mortgage payments or the renter’s rental payments.
• Appreciation of property value. The property’s appreciation in value should provide additional revenue at some point in the future.

As with any investment, however, it is important to note that there are certainly risks in purchasing real estate. If someone invests in a rental property, for ex-ample, and it is not performing, then the investor may be put in a situation of losing more than just the initial monetary investment. For this reason, it is important for new investors to have a good understanding of the industry and to work with lenders and real estate advisers that they can trust.

Despite common misperceptions, investing in real estate is not just for the independently wealthy. What a potential investor does need, though, is a track record of being responsible with their credit, a solid understanding of the real-estate landscape and clear goals so that their investments can be structured properly to achieve maximum returns that can be counted toward their desired outcomes.  

About the author

Jessica Spalding is co-founder and chief operating officer of The Plutus Group, a real estate investment company based in Kansas City, Mo