Real estate is among the oldest high-value asset classes in most parts of the world, including the US. According to one survey, real estate is America’s favorite long-term investment, beating other assets like stocks, bonds, and gold. Besides a steady income stream, other benefits of investing in real estate include tax advantages and a hedge against inflation.
However, real estate has long been the preserve of the wealthy due to the high initial investment. Moreover, the duties of real estate property management are a full-time job.
Fortunately, evolutions in the real estate investment sphere eliminate the two challenges by allowing retail investors to invest with lower capital and avoid property management responsibility.
Keep reading for tips on real estate investments that exclude purchasing property.
1. Real Estate Investment Trusts (REITs)
Real estate investment trusts or REITs are a fractional real estate ownership avenue allowing retail investors to generate income from real estate without owning or managing physical property. As the name suggests, REITs are publicly traded companies that invest solely in real estate as property owners, managers, and mortgage financiers. Therefore, they pool resources from retail investors, channel them into various real estate projects, and pay the investors in dividends (equity REITs) or interest (mortgage REITs).
The simplicity and accessibility of the REIT concept are among the primary reasons REITs are the go-to investment option if you seek to learn how to invest in real estate without buying property.
Moreover, REITs have a higher liquidity potential than traditional real estate avenues. Also, REITs have diverse investment options ranging from office and retail commercial spaces to specialized facilities like hospitals and residential properties like apartment complexes, allowing you to diversify your real estate portfolio.
However, being publicly traded assets, REITs typically offer a limited capital appreciation. Nonetheless, you can invest in non-traded REITs as these can outperform the correlated market interest, increasing their potential for capital appreciation. However, only consider investing in non-traded REITs if you have a high-risk appetite; despite the potential for higher returns, they typically carry higher risk and have a lower liquidity potential.
2. Consider Investing In Real Estate Crowdfunding Platforms
Real estate crowdfunding platforms are websites or apps that link potential retail investors to project managers seeking capital for specific real estate development projects. Therefore, you contribute your investment and generate a resource pool alongside fellow retail investors funding a single project.
As a retail investor, your return on investment for a crowdfunded real estate project varies from profits from the property’s value appreciation, dividends, or equity, depending on the platform. Retail investors in real estate crowdfunding platforms typically receive quarterly dividends, while debt investments mature in five to ten years.
However, real estate crowdfunding ventures are highly speculative because each project is new. Therefore, to minimize risk, consider investing exclusively in real estate crowdfunding platforms that vet developers before linking them with retail investors.
Additionally, conduct due diligence on the project to establish its viability in the short and long term before investing. Lastly, spread the risk by investing in multiple projects rather than one; invest in platforms that excel in diversification.
As a retail investor on real estate crowdfunding platforms, you can fundraise as little as $10 and earn income. However, consider any additional fees the platform may charge.
3. Real Estate Mutual Funds
At first glance, REITs and real estate mutual funds are almost indistinguishable. However, the two trading instruments have fundamental differences.
First, REITs deal directly in real estate assets as financiers, property managers, and owners. In contrast, real estate mutual funds feature pooled investments run by a professional asset portfolio manager.
Real estate mutual fund managers invest exclusively in real estate-related assets, including REITs. Therefore, as a retail investor in real estate mutual funds, you purchase the securities real estate companies offer via your manager’s asset portfolio.
The benefits of investing in a real estate mutual fund include expert fund management, which lowers the risk of getting stuck with non-performing assets. Also, real estate mutual funds have a relatively affordable initial investment and high liquidity.
4. Real Estate Notes
A real estate note is a debt instrument that borrowers or stakeholders in the real estate industry use to acquire or develop property. Essentially, the borrower creates the real estate note, which they issue to investors that loan them money for the property acquisition. Therefore, you earn regular installments when you invest in real estate notes.
Real estate notes fall into various categories based on the associated risk profile. For example, first-lien position real estate loans have a lower risk because the investor is first in line to receive compensation if the borrower defaults. On the other hand, investing in second-lien position real estate loans means you fall second in priority during a default incident.
Besides the lien position, real estate notes can be short-term or long-term. Short-term real estate notes have a higher risk with a higher return potential, and vice versa for long-term real estate notes. Nonetheless, real estate notes have a higher income potential than other debt instruments.
A sublease is a rental property arrangement whereby the primary tenant leases the property to a third party. Therefore, a sublease’s tenancy transfer allows you to generate profit from the property’s rental income without owning it.
Subleasing is legal in the US. However, the property owner must be aware of the tenancy transfer and, in some cases, approve the arrangement. Also, state and city laws on sub-leasing property vary, so ensure you comply with relevant laws.
The real estate investment instruments highlighted above have revolutionized investments in the sector, making it more accessible, affordable, and hands-off. However, each investment instrument has pros and cons, so consult an expert to identify the best property-free real estate venture to include in your investment portfolio.