Help me chose a type of RE investing to pursue

[William P.]

My situation

Have a decent sized portfolio of stocks, bonds, etc and a main residence.  Have about 250K  to deploy in an alternative asset class, preferably one that inst correlated with the stock market.

Work full time as an finance executive in a technology company.  In pretty high tax bracket, particularly living here in Calif.   An investment yielding current income would have a high hurdle to pass.

Live in highest cost RE area in the country - SF bay area. Housing prices are about $700 per square foot for SFR for mid tier suburb. Palo Alto at the top is $1200 per SF. The low income areas are about $300 per square foot. So local market is not a typical one.

Obviously recognize that RE investing is more work than just placing an mutual fund order. That said, I don't have more than 5-10 hour a week to devote.

Skills - I think good business sense, probably everybody thinks they have that tho. Better than average at working spreadsheets  and understanding finance concepts.  Strong analytic skills.

No real estate specific skills.

Dont want to deal with a tenants directly on a regular basis.

Risk averse in the sense that I don't want to take on investments that could bleed over liability into my other assets.  The 250K can be in risky investments, but I am very wary of liability. Of course there is insurance, but there are crazy juries out there too.

As I write this up, I am not well suited to a lot of the categories of investing, but there a lot of niches so I am throwing it out there. I can always buy REIT shares in my 401K, but looking for something with a bit intellectual stimulation to it

[Brian Burke]

Where to allocate money is an age-old question that has different answers for everyone.  For some people, finding the highest return is most important.  That objective comes in two basic sub-categories: people who value current income, and people who value future appreciation.  For other people, finding the highest return is less of a priority.  For them, finding a good risk-adjusted return that requires the least amount of time and effort is the goal. 

Those that seek high return frequently utilize the direct investment approach, buying real estate and managing it themselves or managing a property manager.  Sometimes this works great, and sometimes not so well.  Making great acquisitions requires time and skill, and some people don't devote the proper amount of time or don't possess the proper skill.  This can produce results that fall short of the goal.  If you have the time, you can learn the skill (right here on BP), but this doesn't sound like your situation as you've described it.

Investors who have capital that they wish to diversify into alternatives but lack time or the proper skill and/or experience to successfully execute a real estate plan do have options.  One is to invest into commercial property leased to triple net tenants, with the advice of a skilled broker in the commercial space.  In some areas, $250K might be enough to play.  It would be a little light in the bay area, but it's not impossible to branch out to other areas if you are willing to commit time and travel initially.  A potential downside here is that with a deal small enough to be taken down with $250K might be too small to finance with non-recourse debt.  At the very least, the search for non-recourse debt of that loan size might take some time to locate.

Another option for people in your situation is to invest in syndicated investments.  This is where an investment sponsor offers an opportunity to accredited investors to invest as a group into larger properties.  This seems like a good option for you, as the benefits align with your concerns. 

The investment sponsor, who is an experienced investor that commits full-time to the business of real estate investments, commits the time to select, acquire, and manage the asset.  As an investor in syndicated investments, the most important function for you is to do thorough due diligence on the investment sponsor.  Ask a lot of questions, and look at their track record.  Evaluate the business plan to ensure that it aligns with your goals and is realistic.  

If done correctly, the sponsor obtains the debt, which is non-recourse to the investors, executes the plan, and reports to the investors on a quarterly basis.  In many structures, the investor benefits from depreciation that offsets some or all of the income (which creates a temporary tax shelter).  This also allows you to be a part of a larger property or more properties than you can accomplish by investing on your own.  This is important because smaller properties tend to produce more headaches than larger ones.  For example, I own an 11 unit building that takes more of my time and attention than my 140 unit complex.  Owning part of something big can work out better for you than owning all of something small. 

Investing in syndications is the closest thing I see as the real estate equivalent to investing in mutual funds, other than perhaps REIT investments. Unlike REITs, syndications have little to no correlation to the stock market.

Private lending, as others have mentioned, is also an option. Similar to investing in syndications, due diligence on the sponsor is extremely important. The downsides to private lending as I see it in your case are two-fold. First, the objective of private lending is primarily current income (via interest payments) for which there is no tax shelter (unless done through a self-directed IRA) which runs contrary to your goal of not producing additional taxable income. Secondly, the returns are likely to be less than in direct investing or syndication. Experienced flippers have a lot of lenders competing for their business and that has driven down borrowing costs (and thus return to the investor). Returns north of 10% are still achievable, but more often than not those rates are paid by flippers with less experience than you'd likely feel comfortable with.

Good luck!