Passive Equity Investments: Leveraging Opportunities For Long-Term Growth

Passive investing is a strategy that aims to maximise returns by minimising the costs of buying and selling securities. It is typically done by investing in a mutual fund or exchange-traded fund (ETF) that mimics the index's holdings. Leveraged investing, on the other hand, is a technique that seeks higher investment profits by using borrowed money. While passive investing often seeks a long-term, buy-and-hold approach, leveraged investing exposes an investor to higher risk and requires constant research and adjustment.

There are several ways to use leverage when investing passively in real estate. One way is to leverage knowledge and experience by learning from others who have spent years becoming experts in passive real estate investing. Another way is to leverage financial strength by taking out a loan to acquire real estate. A third way is to leverage a built-out team by investing with a professional sponsor who already has a team in place. Finally, investors can leverage their time by investing in syndications, which allow them to spend less time upfront and simply wait for the income and investment to pay off.

Leveraging up on property

There are several ways to access leverage for property investment. The most common way is to take out a mortgage, which typically requires a 20% down payment to get access to 100% of the property value. This is known as a loan-to-value (LTV) ratio of 80:20. There are also other financing options available, such as home equity loans or lines of credit (HELOC), business credit cards, or private loans from friends, family or business partners.

However, leveraging up on property also comes with risks. If property values decline, you may end up owing more than the property is worth, which can lead to financial distress. Additionally, if you are unable to make mortgage payments, you could lose your assets and face foreclosure. It is important to carefully consider the risks and ensure you can afford the loan payments before taking on leverage.

Arbitraging with a CD

Understanding Arbitrage:

Arbitrage is a fundamental concept in finance, where traders simultaneously buy and sell similar assets in different markets to profit from price differences. This strategy takes advantage of market inefficiencies and exists due to variations in asset prices across various markets.

Types of Arbitrage:

There are different types of arbitrage strategies, including spatial arbitrage, statistical arbitrage, and merger arbitrage. Spatial arbitrage focuses on price differences across geographic locations, while statistical arbitrage uses complex mathematical models to identify price inefficiencies. Merger arbitrage, on the other hand, involves buying shares of a company that is about to be acquired, expecting the share price to increase after the acquisition.

Leverage and Risk:

Leverage is a common element in arbitrage strategies, as it allows traders to amplify their potential gains. However, it's important to note that leverage also increases the risk of losses. Arbitrageurs need to carefully manage their leveraged positions to avoid potential pitfalls.

Example of Arbitraging with a CD:

Now, let's apply these concepts to the scenario of arbitraging with a CD (Certificate of Deposit). In the example shared, an individual has observed that the lowest interest rate for a 30-year fixed-rate mortgage is 5.25-5.5%, resulting in a monthly payment of $560 for a $100,000 loan. Simultaneously, they have found high-interest CDs or savings accounts offering rates approaching 5%. By investing $100,000 in such a CD, they can earn $5,000 in interest over a year. This effectively covers 70-80% of the yearly mortgage payment, creating a unique arbitrage opportunity.

Benefits and Risks:

The benefits of this arbitrage strategy include profiting from the interest rate differential and potentially building equity in the real estate market without a significant financial burden. However, there are risks to consider, such as changes in interest rates, early withdrawal penalties associated with CDs, and the dynamic nature of mortgage rates, which may reduce the arbitrage opportunity over time.

In conclusion, arbitraging with a CD involves leveraging the simultaneous existence of high-interest CDs and low mortgage rates. While this strategy offers the potential for risk-free profits, it also carries certain risks and complexities that investors need to carefully evaluate before proceeding.

Real estate as a passive income generator

Passive income from real estate includes any income generated from rental activities and other real estate investments. While some passive real estate investments demand more hands-on management, others are truly passive.

Publicly Traded Real Estate Investment Trusts (REITs)

REITs are traditionally the easiest and lowest-cost way to invest in real estate for passive income. They are considered passive investments because you only need to research and follow the investment. They are also highly liquid, as investors can buy and sell shares through a brokerage account. However, they are subject to stock market volatility.

REIT Exchange-Traded Funds (ETFs)

REIT ETFs are ideal for beginners looking to generate passive income from real estate. They hold a broad basket of REITs, reducing the risk of losing income if a single investment cuts its dividend. They are highly liquid and trade on the stock market. However, they are subject to stock market volatility and charge an ETF expense ratio fee.

REIT Mutual Funds

REIT mutual funds are actively managed and aim to buy shares of REITs that will deliver superior performance. They tend to have a higher expense ratio than REIT ETFs and a higher minimum investment, usually around $2,500. They provide investors with broad exposure to the sector.

Non-Traded REITs

Non-traded REITs are purchased through a direct-to-consumer online portal or a financial advisor. They have historically offered higher income yields than publicly traded REITs and are less volatile. However, they often have a higher minimum investment and are relatively illiquid.

Real Estate Syndications

Real estate syndications enable passive investments in commercial real estate, allowing investors to become limited partners in a single real estate asset or a private equity real estate fund. They offer higher income yields than publicly traded REITs and are less volatile. However, most real estate syndications are only open to accredited investors and have long-term holding periods.

Debt and Debt-Like Investments Backed by Real Estate

Real estate-backed debt can be another source of passive income. This includes buying mortgage notes, acting as a hard money lender, or investing in mezzanine debt or preferred equity. Real estate debt is typically a lower-risk, fixed-income investment.

Short-Term Vacation Rentals

Short-term vacation rentals are a popular way to generate passive real estate income. Web portals like Airbnb make it easy to list properties and find renters. However, they require significant management and are subject to high vacancy rates.

Rental Properties

Owning rental properties can provide relatively steady passive income from long-term tenants. However, it is not entirely passive, as it may involve maintenance and repairs. There can also be unexpected costs and fluctuations in income.

Ground Leases

Ground leases allow you to generate passive income by owning the land underneath a building and leasing it to the owner. They offer predictable passive lease income and are considered a low-risk investment. However, they have a high upfront cost and provide less income potential.

Leverage in Passive Equity Investments

Leveraged investing is a technique that seeks higher investment profits by using borrowed money. This can lead to greater profits but also exposes the investor to higher risk.

While passive investing typically aims to minimize costs and complexity, leveraging can be used to amplify returns in passive equity investments. This can be achieved through margin loans, equity futures contracts, or call options.

Margin loans use the equity in an investor's account as collateral for the debt. Equity futures contracts provide higher leverage at lower interest rates than margin loans. Call options combine the leverage and interest rates of futures with hedging to limit downside risk.

Using a HELOC for home improvements

• Interest rates: HELOCs typically have variable interest rates, which means your interest costs may fluctuate over time. This can make it difficult to predict your total borrowing costs.
• Draw and repayment periods: HELOCs usually have a draw period, during which you can access funds and make interest-only payments. This is followed by a repayment period, where you repay the borrowed amount plus interest. The draw period typically lasts 5-10 years, while the repayment period can be 10-20 years.
• Credit limits: The amount you can borrow depends on the value of your home and your equity in it. Lenders typically allow you to borrow up to 80%-90% of your home's value, minus your remaining mortgage balance.
• Tax deductions: In some cases, the interest paid on a HELOC may be tax-deductible if the funds are used for substantial home improvements. Be sure to consult a tax professional to understand the specific guidelines and eligibility requirements.
• Closing costs and fees: HELOCs typically have lower closing costs than a full refinance, but there may still be application fees, annual fees, or early termination fees associated with the loan.
• Risk of foreclosure: It's important to remember that your home serves as collateral for a HELOC. If you fail to make payments, you could default on the loan and risk losing your home in foreclosure.

Overall, a HELOC can be a useful tool for financing home improvements, but it's important to carefully consider the benefits and risks before proceeding. Be sure to shop around and compare offers from multiple lenders to get the most favourable terms for your financial situation.

Investing in real estate through Fundrise

Account Tiers and Investment Strategies:

Fundrise offers five account tiers with different investment options and minimum requirements: Starter, Basic, Core, Advanced, and Premium. Each tier provides access to various real estate investment trusts (REITs) and funds tailored to different strategies, such as fixed income, core plus, value add, and opportunistic.

Long-Term Investment Horizon:

Fundrise recommends a long-term investment horizon, typically at least five years. Some of their funds offer penalty-free early redemptions, but most do not. It's important to note that Fundrise may restrict withdrawals during economic downturns or real estate market downturns.

Accessibility for Non-Accredited Investors:

Fundrise is designed to cater to smaller, non-accredited investors. While they also offer options for accredited investors, their main focus is on providing access to those with lower investment amounts. The minimum initial investment for the Starter tier is as low as $10, making it highly accessible.

Private REITs and Liquidity:

Fundrise manages private REITs that are not publicly traded. These private REITs offer better liquidity than owning your own real estate property but have much lower liquidity compared to publicly-traded REITs. Investing in private REITs through Fundrise entails higher risks, especially during market downturns, as there may be limited options for redeeming your investment.

Fees and Costs:

Fundrise charges an annual advisory fee of 0.15% and an asset under management fee of up to 0.85%. Additionally, there may be development or liquidation fees associated with specific real estate projects, which are deducted from the fund's returns. Some funds, such as the private eREITs and Fundrise eFund, charge a 1% penalty if you withdraw within five years of investing.

Investment Variety and Potential Returns:

Fundrise offers a range of investment strategies, from safe income funds to higher-risk growth real estate funds. As your account balance grows, you can also explore non-registered funds with more diverse strategies. Real estate investments through Fundrise have the potential to generate higher income and returns compared to traditional investments in stocks and bonds.

User-Friendly Platform:

The Fundrise platform is easy to use, allowing users to open an account and start investing within minutes. It provides a user-friendly interface for selecting investment strategies, tracking progress, and visualizing ongoing real estate investments.

Customer Support and Transparency:

Fundrise offers email and ticket-based customer support during standard business hours. However, they do not provide a dedicated customer service phone line, which may be a limitation for some investors. Additionally, the platform's fee structure can be somewhat complex, and complete fee information may require further digging beyond the main website pages.

Frequently asked questions