Have you ever wondered if its possible to invest in real estate without actually having to own and operate it? If so, you aren’t alone. This is a smart and savvy question, especially if you’re just getting started and don’t have a lot of capital to put down to beat out your competition.
As you’re probably starting to learn, real estate has quite a few unique aspects that make it intriguing.
First, real estate is a hard (“real”) asset, which makes it more resilient during a recessionary period. Second, it serves one of the world’s most basic needs by providing shelter. Third, the tax advantages associated with real estate are unreal. You can write off mortgage interest, depreciation, and frequently, defer capital gains taxes (taxes on your profits) by using either a Home Sale Tax Exclusion or a 1031 Exchange.
For these reasons, you might consider whether it might make sense to diversify into the real estate sector.
Of course, owning real estate does comes with the “Three T’s”: Tenants, Termites, and Toilets. That is to say, acquiring, financing, and managing real estate can be a real pain. Thankfully, there are numerous different ways you can invest in the housing and real estate market without having to be a landlord or deal with tenants.
Let’s take a look at eight of them below.
1. Investing in REITs
One option is to invest in real estate investment trusts (REITs), so that you don’t have to hold physical property.
REITs are a pool of properties and mortgages that get bundled together and sold as a security (a financial instrument).
Each share in a REIT, often called a “unit”, represents a fraction of ownership in the properties that are owned. In this way, REITs are very similar to real estate mutual funds and ETFs.
REITs allow you to invest in the real estate market, while also diversifying the holdings you control based on the real estate classes the REITs have invested in. This diversification feature is a large reason why these types of investments are popular.
With that being said, if you choose to go this route, it’s generally better to purchase publicly-traded REITs and avoid the non-traded ones.
The SEC, or United States Securities and Exchange Commission, recently warned the public against non-traded REITs, claiming that their lack of value transparency, high fees, and lack of liquidity creates undue risk.
By law, REITs must pay out at least 90% of their net earnings as dividends.
Thus, the average REIT pays out a dividend yield of 3-4%, much higher than Treasury Notes or the S&P 500.
For example, two REITS you could consider investing into include Essential Properties Realty Trust, Inc. (EPRT) and Innovative Industrial Properties, Inc. (IIPR).
While REITs do have many benefits, most notably paying out high dividends, a major downside is that unlike stock dividends, which are currently taxed as capital gains at a maximum of 20%, REITs are taxed at your ordinary-income rate, which can be as high as 37%.
To minimize these taxes, some people buy REIT shares in tax-advantaged accounts like an IRA or 401(k), but this limits your ability to access your money (and its investment gains) until you are 59.5 years.
- Investment Examples: Essential Properties Realty Trust, Inc. (EPRT), Innovative Industrial Properties, Inc. (IIPR)
2. Investing in Real-Estate ETFs
Exchange-traded funds, or ETFs for short, are collections of bonds and stocks in a single fund.
An ETF is very similar to a mutual fund or index fund. In fact, they come with similar low costs, as well as the same broad diversification characteristics.
If you want to make some real estate investments and still be able to diversify, then getting in on real-estate ETFs might be a smart move to make.
For instance, Vanguard’s VNQ is a real-estate ETF that invests in stock issued by REITs. Meaning, it is an ETF of REITs. Another real estate ETF, iShares U.S. Real Estate ETF (IYR), works in a similar manner because it provides targeted access to domestic REITs and real estate stocks.
- Investment Examples: Vanguard’s VNQ, iShares U.S. Real Estate ETF (IYR)
3. Real Estate Mutual Funds
Just the way one can invest in real estate based ETFs, you can also buy real estate mutual funds. An example of a real estate mutual fund is DFA Real Estate Securities (DFREX).
This particular fund boasts a great track record, which helps some investors to feel confident about the future returns they’ll receive. This is a bit silly because past returns don’t predict future performance, but many people cite this nonetheless.
In addition to its relatively affordable pricing, the DFREX strategy is backed by years of academic research that have been conducted by Nobel Prize-winning economists.
Another great real-estate mutual fund that a lot of experts in this sector like is the TIAA-CREF Real Estate Securities Fund (TIREX). This platform has almost 2 billion dollars in assets as well as low fees and broad diversification capabilities among real estate holdings.
- Investment Examples: DFA Real Estate Securities (DFREX), TIAA-CREF Real Estate Securities Fund (TIREX)
4. Hard Money Real Estate Loans
If the other options on this list aren’t that appealing, but you have some extra cash to invest, then you could consider giving out hard money loans. Many people are starting to adopt this strategy to invest in real estate without owning any.
Hard money loans are loans that are provided by individuals or investors instead of banks.
They are called “hard money” because the interest rates are often higher than when you use a traditional mortgage lender. Generally, the property is used as collateral for the loan and they tend to be short-term loans with a balloon payment at the end.
Typically, borrowers will either sell or refinance the property before the loan term is done so they can make the final “balloon” payout.
Put simply, a hard money loan is giving someone a direct loan to buy a piece of real estate.
You can either give out loans only to people that you know or you can give them to the public as well.
What is exciting about this approach is that you can receive as much as a 15% return on your money, in some cases.
This approach is great if you don’t want to deal with landlord responsibilities, but still wants some exposure.
If you want to make these loans directly, then you’ll need to find people looking for hard money loans and have an attorney to draw up the contracts for you.
If you’d prefer to have someone else handle the logistics for you while still getting paid, then I’d suggest you check out LendingHome.com.
While you have to be an accredited investor to partner with Lending Home, this option could be a good fit if you are a high-net worth individual who wants to get into hard money lending without having to handle the legal details.
- Investment Examples: LendingHome.com
5. Crowd-Sourced Real Estate Investing
Yet another option is crowd-sourced real estate investing.
There numerous companies that are up popping online that are designed to help investors make their way into the real estate game, without having to get their hands dirty.
Websites like FundRise.com allow people to invest in residential and commercial real estate and receive cash flow in return.
FundRise is a crowdsourced real estate fund that has an impressive record of providing annual returns from 8.7 to 12.4 percent. The company will let you invest in real estate online through an electronic Real Estate Investment Trust, called an e-REIT.
I like that FundRise has historically paid out 8-12% return to investors over the past 20 years, has their fund backed by real (“hard”) assets, and lets you invest for as little as $500.
Other alternatives to Fundrise that are also crowd-sourced real estate investing platforms include Realty Mogul, RealtyShares, Patch of Land, Peerstreet, and more.
Investing with such companies is the same as investing in REITs, because your money gets pooled alongside cash from other investors participating in the e-REIT.
- Investment Examples: FundRise.com, Realty Mogul, RealtyShares, Patch of Land, Peerstreet
6. Trust Deed Investing
Another interesting option for real estate investing is trust deed investing. Trust deeds transfer the legal title of a piece of real estate to a third party, such as a bank, escrow or title company, to hold until the borrower repays his debt to the lender.
One way to do trust deed investing, without having to learn anything about it, is to partner with the group, Barnard Enterprises.
Barnard’s high-yield trust deed lending is a great way to earn strong returns, with relatively low risk, while having them manage the technical and legal aspects for you.
Wit this approach, you can earn a set interest rate, secured by real property using your savings, credit lines, or retirement accounts.
- Investment Example: Barnard Enterprises
7. Mortgage Tax Liens
Mortgage tax liens are another lucrative investment option that many people aren’t aware of. With this approach you can sometimes earn up to 18% per year without having to actually own the property.
The way that mortgage tax liens work is that when a property owner doesn’t pay their real estate taxes, the county in which the property is located can sell its tax lien.
The person who buys that tax lien then has the right (but not the obligation) to foreclose on the property if the owner fails to pay you back the taxes plus interest. In short, investors buy the liens in an auction, paying the real estate taxes owed in exchange for the right to collect back that money plus interest from the property owner.
If the owner of the house doesn’t pay, then you foreclose on the property and get the title in order to receive the back taxes, penalties, and fees that are still owed.
You can invest in mortgage tax liens through the county government. Most counties hold annual tax lien sales and online auctions.
This typically requires that you register in advance and pay a small fee.
8. Real Estate Funds and Syndications
Perhaps one of the best ways to invest in real estate without owning any, is to “ride along” in deals done by other real estate investors.
For example, real estate mogul Grant Cardone will let you partner with him on large multifamily apartment deals through his fund, Cardone Capital. What Grant has done something is quite rare in that he lets you directly own a share of his real estate deals. Meaning, with his fund you are investing in the apartment complexes that he buys. For this reason, when you invest with Cardone Capital, you get issued a year-end tax form called a K-1.
Another benefit of this approach is that when you invest in a real estate deal like this, your cash distributions are usually not subject to federal income tax rates the way that they are with a REIT.
Typically, real estate syndicators offer real estate funds for accredited investors, because these funds are easier to create while staying compliant with U.S. SEC regulations. These funds require a minimum investment of $100K. Unfortunately, you won’t qualify to invest in an accredited fund unless your annual salary has been over $200K for at least two years or you have a net worth over $1 million after excluding your primary residence.
Interestingly, Cardone Capital managed to established a few Regulation A+ Funds. This fund structure permits anyone to invest regardless of income and net worth. Practically speaking, this means he got permission from the SEC to accept investments from the regular (non-wealthy) people. Unfortunately, both of its Regulation A+ funds are now closed to new investors.
There are also dozens of other real estate syndicators with whom you could partner, but the majority of them will require you to be an accredited investor. I posted a list of real estate syndicators here.
It should go without saying that you need to do your own due diligence before investing with a real estate syndicator.
- Investment Example: CardoneCapital.com, Post Real Estate Group (PREG), SNS Capital Group, Patriot Holdings, and others
How to Invest in Real Estate without Owning It
Investing in real estate without having to own physical property is not as hard as most people make it out to be.
Hopefully this article gave you some actionable tips on how to get started. Did it give you some creative ideas? Let me know in comments below.