Real estate investing is one of the most powerful wealth creation tools around. But where there’s money, there are scammers ready to take it. We’ve all heard stories of real estate scams, fake money gurus and bad landlords. The good news? You don’t have to be a jerk or fall prey to one in order to make money in real estate. In fact, you can make more money by helping build a better world through sustainable real estate investing. Your health, your heart and your wallet will thank you for it.
Sustainable Real Estate Investing Is Now A Thing
Sustainable and impact investing has grown over 100% since 2012, according to a 2017 study from EY (formerly Earnst & Young). This trend is now making its way to real estate investing. Some of our readers asked us if there was such a thing at sustainable real estate investing. In other words, is it possible to do well and do good through real estate investing? The answer is yes. From sustainable REITs to socially responsible landlord and investor practices, there are multiple ways to have positive impact and make money with real estate investing.
First, let’s take a look at how real estate investing can help communities and the environment.
How Real Estate Investing Helps People and Planet
You can make profit and have measurable positive impact through real estate investing. Here are a few of ways that real estate investing can help communities and the environment:
- Provides a home for people: It seems obvious, but everyone needs a home. By being a good landlord, you help build goodwill and a sense of pride for you and your tenants.
- Builds community: Little gestures go a long way. Years ago, before becoming a real estate investor, my landlord left us a tin box of popcorn for the holidays. I still remember this gesture. It pays to keep lines of communication open. When you own property, you have the opportunity to build community. The result: you will attract long term tenants who create homes they are proud to live in.
- Helps the local economy: When you buy real estate, it is likely you will use plumbers, electricians, handymen and other small businesses that make up the ecosystem of the local economy. Bonus: you get to decide which conscious businesses to seek out. By working with businesses that care about People and Planet, your impact is amplified.
- Helps the environment: As a landlord, you can save money (translation: make money) by employing eco friendly housing practices. This includes using green building practices, high efficiency light bulbs, non toxic paint, energy efficient windows, geothermal heating/cooling, updated insulation (even simple things like weather stripping), and educating renters on ways to reduce energy consumption while making money.
The Benefits of Real Estate Investing
With real estate investing, you own your own business. This type of business is highly flexible, letting you put in as much or as little time as you want into it. The cash flow from real estate also provides freedom. You can use this cash flow to quit your day job, fund an education, or launch your passion project. Here are some of the benefits of real estate investing.
- Cash flow: If you buy right, you can make enough money from rentals or leases to cover all of your expenses, and then some.
- Appreciation: Real estate naturally appreciates about 3% to 5% per year. Not all years will be up years (as we saw in 2008). But real estate is less volatile than the stock market. In addition, there are things you can do to accelerate appreciation (e.g. renovations).
- Equity: You build equity in the property as market conditions increase the value of your home. You can even tap into that appreciation (without selling) through refinancing, then use that money to buy additional properties.
- Debt reduction: Someone else (the tenants) are paying down your mortgage.
- Tax breaks: It’s a weird and wonderful thing. Your asset appreciates, even though the asset itself (the physical structure of the property) depreciates. You get to write off that depreciation from your taxes.
- Inflation hedge: Even when inflation is high, this can be good for the real estate you own, because inflation also forces higher rental prices. In addition, the underlying asset (the property) can be counted on to be there in the future. The same cannot be said of other investments in high inflation scenarios. Plus, with higher inflation, the size of your loan (the mortgage) becomes smaller, since money is now worth less.
Seven Ways To Get Into Sustainable Real Estate Investing (While Avoiding Scams)
There are multiple ways to make money with sustainable real estate investing. Here’s an overview of various strategies. We’ve included the good and bad behavior associated with each.
1. Sustainable REITs
- What is it: Real Estate Investment Trusts (REITs) have been around for some time. A REIT is an investment vehicle that is made up of many income producing real estate assets. You can buy REITs through your online brokerage account, just like you would by a fund or a stock. There are a number of Sustainable REITS that take a socially responsible approach. These REITS use green building standards (such as LEEDs certified buildings) and strategies to reduce consumption and conserve natural resources.
- Good for: Passive investing, income generation.
- Time investment: Low (online research of publicly traded REITs).
- Note: You won’t make as much money using REITs as you could with direct real estate investing. This is because the portfolio managers, fund administrators, and the team managing the underlying properties charge fees for their services. But sustainable REITs could be a good option for people who want a hands-off approach to sustainable real estate investing.
- Scams: Many REITs are registered with the SEC and publicly traded on a stock exchange. You can buy these from your online broker. That’s good news for us investors because of the built-in regulatory protections. Our recommendation is to stick to publicly traded REITs. There are privately held REITs that often promise higher return. This often means higher risk and sometimes fraud. Even if you buy a private REIT, make sure they are registered with the SEC.
2. Buy and Hold
- What is it: Buy a property, rent it out. This could be a single family home, a duplex, triplex, or quadplex. As an investor, you make money on appreciation, monthly cash flow and tax benefits. This is my favorite type of real estate investing. Why? It’s straightforward.
- Good for: Long term appreciation and cash flow.
- Time investment: Medium / low. You can manage this type of real estate investing while holding down a full time job.
- Scams and unethical behavior: There are many landlord scams out there, from landlords keeping the security deposit, to fake (copied) listings, to expensive background checks. I recently had a prospective tenant fall prey to one of these scams. A scammer had copied our rental listing from Zillow and put up a fake listing on Craigslist. The scammer listed the property at below market rates and then demanded that potential renter send them the security deposit right away in order to “secure their spot”. Once they had their cash, they vanished.
- How to be a good landlord: Be a good human. Think about ways to make your rentals People and Planet friendly.
- Don’t overcharge for background checks, pets, application fees or incidentals.
- Remember, you are building a relationship with a community of people who will be taking care of your property for the long term. If you treat people well, they will treat your property well. Don’t create harsh rules for the 5% of people who break them. Instead, create business practices for the 95% who are good caretakers.
- Give people plenty of notice before entering their home.
- Return deposit checks on time. Don’t nickel-and-dime people for normal wear and tear.
- Be fair. If you have an energy inefficient house with single pane windows from the 1950’s that you’ve refused to upgrade, don’t expect your tenants to pay the full amount for heating and cooling. Make the home energy efficient or share in the cost of heating/cooling.
- Remember that what goes around comes around. There will come a day when you need a favor from your tenants (e.g. a last minute inspection request). It pays to build good relationships.
- What is it: Maybe you’ve seen the signs: “we buy ugly houses” or “we buy houses for cash”. A wholesaler is someone who enters into a contract with a home seller, markets the home to potential buyers, and then assigns the contract to one of the buyers. Wholesalers make a profit by buying the home at a low cost and then selling the contract to another buyer at a higher price.
- Good for: Generating a lump sum of cash.
- Time investment: High (no matter what some money gurus may tell you).
- Scams: The scams associated with wholesale deals come in three forms. Note: there are legitimate wholesalers. This does not apply to all wholesalers.
- If you want to become a wholesaler, watch out for investment seminar scams (see below) that promise to teach you how to wholesale. Be warned that this is not a get-rich-quick scheme. It requires significant time, effort and marketing to get going.
- Second, there are some wholesalers who use shady practices to convince people to give up their properties for a fraction of their value. Or they lock up the property in a contract for months and then are unable to close. These wholesalers target vulnerable people who are in pre-foreclosure, probate, the elderly, low income, or those trying to sell quickly.
- The third type of real estate wholesale scam can happen when you as the buyer try to buy a property from a scammy wholesaler. Charlatan wholesalers will, for example, overprice the sale of the property. Remember, the whole point of of a wholesale is to buy low and sell low. The wholesaler makes their money on volume. If the wholesaler tries to offload property at a premium, the investor will eventually find out how much they paid for it and will stop doing business with the wholesaler.
- How to be a good wholesaler: There’s a market for people who need to sell quickly and don’t want to use a realtor. Being a wholesaler can be a benefit to the community. To be a good wholesaler:
- Be completely transparent about how you will make money.
- Let people know their options. Don’t pressure or burden vulnerable people with unnecessary risk.
- Don’t over promise your ability to close.
- Don’t lock up people’s property for months because you can’t find a buyer.
- Provide references.
- Avoid scammy marketing gimmicks. Don’t spam people. Don’t collude with other wholesalers to entrap people through marketing. Build relationships instead.
- Learn from good people. Attending one real estate seminar does not make you a wholesaler. Take the time to build a real business. There are reputable wholesalers who’ve build their brands and reputations over years. Learn from them before you start marketing.
- And remember, it’s your brand. What kind of energy do you want to put out into the world?
4. Fix and Flip
- What is it: The reality TV shows have spurred a wave of new fix and flip real estate investors. Here, investors will buy a property, put in some improvements, and sell it at a higher price. Fix and flip real estate investing is highly speculative because you’re floating the cost of maintaining and updating the property while it is being renovated. Some argue that it’s a good way to generate cash. But watch out for taxes, construction risk, and markets flooded with fix and flip investors.
- Good for: Generating a lump sum of cash.
- Time investment: High intensity, medium term.
- Scams: Con artists participate in illegal house flipping by getting certain appraisers to value property for more than it’s worth. Also be on the lookout for cash out purchase fraud. Finally, before you attend any real estate investing seminar that promises to show you how to flip homes, do your homework.
- Sustainable fix & flip options: There are many free resources to help you get started on fix and flip real estate investing. The biggest thing to remember is that you are putting yourself out there. If you want to build a healthy long term business that helps our communities and the environment, make choices that support your strategy.
- Consider making the home energy efficient (a great niche strategy to get high intent buyers).
- Look up necessary state and city permits associated with solar panels and other green retrofit options.
- Check out options to finance green home retrofit projects at a low cost.
- What is it: Real estate investors buy properties in pre-foreclosure from motivated sellers.
- Good for: Generating a lump sum of cash (if flipping) or long term appreciation and cash flow (if holding).
- Time investment: High. For seasoned real estate investors only. You’ll need to spend a lot of time learning how to do this the right way.
- Scams: There are plenty of examples of people getting scammed in pre-foreclosures. Scams range from companies claiming to help homeowners with loan or HAMP modifications (that program closed in 2017), to scammers pressuring home owners to sign contacts, wire funds or quit claim their home deeds for the purpose of getting the home out of foreclosure, only to have the scammer take additional loans out on the home.
- How to invest ethically in foreclosures and pre-foreclosures: Foreclosures and pre-foreclosures happen. People fall on hard times for a variety of reasons. As a sustainable estate investor, you can help people save their credit and provide cash for their home. I am not a fan of this type of real estate investing because there are too many variables and opportunities for buyers and sellers to misunderstand each other. But if this is a strategy you want to pursue, there are basically two ways to go about it:
- Pay off the loan yourself in an all cash deal and take possession of the property.
- Make back payments to the bank to bring the loan up to current and take ownership of the property using a Subject-To agreement. You would not want to start making back payments or improvements unless you owned the property, which is why the seller deeds the house over to you, even though the mortgage remains in their name. Again, not a fan of this strategy, especially for newer real estate investors. But if you pursue it, make sure that all parties involved go into the deal eyes-wide-open. And remember to be a good human.
6. Lease-to-Own / Rent-to-Own
- What is it: A lease-to-own options gives people a way to own their home after a period of time. Here, the tenant pays you (the owner) a higher monthly rent for the right to buy the home in the future. As the owner, you finance the mortgage (either through a bank or from your own funds). After 2 to 3 years, the tenant has built enough credit to get their own bank financing. At this time, the tenant exercises their option to buy the home. This can be a good strategy for people who don’t have sufficient credit or down payment to purchase a home.
- Good for: Higher cash flow and lower maintenance cost vs. regular rentals (tenant is responsible for property upkeep).
- Time investment: Medium.
- Scams / unethical behavior: There are investors who take advantage of people through rent-to-own scams. Scams can include unpaid property taxes, uninhabitable homes, unmet promised fixes or homes under foreclosure. Even with legitimate rent-to-own options, some investors deliberately hide details in the contract. For example, the deal is off (and the owner keeps the higher monthly payments made) if the tenant is delayed in even one payment. Or the negotiated price no longer holds up to market rates when it comes time for the tenant to buy the home. That means the tenant cannot get financing and the home goes back to the seller.
- Ethical rent-to-own / lease-to-own options: As an investor, you have the chance make money and have a positive impact on people’s lives. As an investor, you are in need of higher cash flow. The tenants are in need of home ownership. This can be a win-win. Here’s now to do it the right way:
- Don’t lock people into a price point that may not be supported by market rates when the time comes for the tenant to exercise their option to buy.
- Base the final sale price on fair market value, as determined by an independent appraiser.
- Don’t break the contract if the tenant is late one month. Find another way (a late fee, for example).
7. Other Types of Real Estate Investing
There are other ways to invest in real estate, including syndicated deals and private placement. These types of investments often require accredited investor status because they are highly speculative. Remember that people like to share when they made money from deals, and often stay quiet when these types of deals go south. If you pursue these types of deals, make sure to get references.
Finally: Watch Out For Pricey Real Estate Investment Seminars
One final word of caution: watch out for real estate investment seminars. This is a touchy subject because some seminars and courses are in fact valuable. However, many have earned a reputation for taking their students’ money and not delivering sufficient value. At the same time, remember that real estate takes work, time and capital from YOU. So you can’t solely blame the seminars if you don’t put in the effort. There is no get-rich-quick scheme in real estate.
Out of curiosity, I recently attended a multi-day real estate investing seminar. I’ve outlined the following words of caution in order to save you money and time. These seminars often start with a free seminar that is then used to up-sell you to the multi-day seminar.
Watch out for seminars and gurus that:
- Have no money back guarantee.
- Use the first paid seminar as a way to get you to buy more seminars (often in the tens of thousands of dollars).
- Use scammy sales tactics and charming presenters that prey on your emotions.
- Speed through the valuable aspects of the course while stretching out the emotional stories.
- Incorporate political conspiracy theories into their rhetoric (all the while telling you it’s not political).
- Teach techniques that take advantage of uneducated people.
- Dismiss any questioning of their techniques.
- Ask you to use their appraisers, lenders, sellers, or others in their network (there is often a kick-back).
- Ask you to pay tens of thousands of dollars to access a mentor.
- Have had more than one lawsuit in the last two years, have gone bankrupt, or have too many negative reviews. (Google them, search the Better Business Bureau and do a background check on any money guru.)
Instead of a seminar, consider doing the following:
- Check out the many free resources online.
- Attend your local real estate investment club and get to know people in your area. learn from referrals.
- Build your own power team of professional contractors, mentors, agents, lenders, handymen, and property managers.
There is no shortcut to real estate investing, no matter what the money gurus promise.
Do Well And Do Good With Real Estate Investing
Real Estate has the potential to create substantial income and net worth, as well as positive impact for our communities and the environment. It is up to us to determine how we want to deploy our capital and energy into the world. Let’s be one of the good guys and create the world we want to see.
Photo by Deva Darshan