Ask ten investors for advice, and you’ll likely get ten different opinions. But there’s one golden rule they’d all agree on – the importance of a diversified portfolio. In other words, not putting all your eggs in one basket.
You’re probably wondering how to diversify your real estate portfolio. Often, people think this means owning various types of properties. But let’s face it – that can be too expensive and stressful!
The great news is that real estate investment doesn’t have to mean buying a property. There are plenty of real estate investing options that let you diversify without actually having to buy properties yourself.
This article will dive into these alternative methods of real estate investment. You’ll discover how to invest in real estate without buying property. I’ll go over each strategy so you can find what fits your budget and risk appetite.
Ready to dive into the specifics? Let’s go.
Buying a property to invest in real estate can be expensive. Consider alternative options like REITs, real estate mutual funds, real estate crowdfunding, real estate clubs, real estate notes, real estate syndications, and wholesaling.
Many of these options offer potential income through dividends, interest payments, or profit-sharing from real estate ventures.
Joining a real estate club, like SparkRental, can give you access to educational resources, network with other investors, and invest in vetted real estate opportunities.
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8 Ways to Invest in Real Estate Without Buying Property
According to Redfin, the average U.S. house price in January 2024 is $408,459. That’s a lot of money. Saving for a down payment alone can take years, and being a landlord isn’t for everyone. Think about late-night plumbing emergencies, dealing with tenants who pay late, and unexpected major repairs – it’s a lot to handle.
If buying and managing properties is not feasible for you, there are other ways to grow your real estate investment portfolio without directly buying an investment property. Here are eight alternative ways to consider:
1. Invest in Real Estate Investment Trusts (REITs)
Real estate investment trusts or REITs are companies that own and manage different types of income-producing commercial real estate.
They are like the stock market version of real estate. When you buy shares in a REIT, you’re basically buying a slice of big investment properties – think apartments, office buildings, hotels, and more.
Typically, REITs make money by leasing out space in the properties they own to tenants. As those tenants pay rent, the REITs earn profits. The income generated gets passed along to shareholders in the form of dividends.
Publicly traded REITs are regulated by the Securities and Exchange Commission (SEC), adding a layer of security and oversight. Since they trade like normal stocks, you can invest seamlessly through any existing brokerage account you have. It’s nice and easy, even for beginners.
With REITs, you get to instantly diversify across multiple properties, something that is challenging for other investors to achieve on their own. And rather than searching property listings and managing cranky tenants at 3 AM when the toilet explodes, you get to sit back as the professional management handles all that. The steady dividends are nice, too!
2. Invest in Real Estate Mutual Fund
Just like regular mutual funds, real estate mutual funds pool money from many investors and use that money to invest in a portfolio of securities – which in this case are REITs, real estate stocks, mortgage securities, and other property-centric investments.
So, with one single purchase, you get exposure to hundreds of income-producing real estate assets across different markets – rental properties, residential real estate, retailers, you name it.
Real estate mutual funds and REITs are not exactly the same. While a REIT is an actual company that owns and manages properties, mutual funds are collections of investments that a professional property manager carefully manages.
Real estate mutual funds are traded only once per day after the market closes. The price is based on the fund’s net asset value (NAV) at the end of the trading day. This means you can’t instantly buy or sell mutual fund shares during the trading day.
3. Invest in Real Estate Crowdfunding
Real estate crowdfunding platforms are online sites that give accredited and non-accredited investors access to real estate investments. It has the same concept – people pool their money on these platforms to invest in different kinds of real estate ventures.
How it works: Developers scout acquisition opportunities, complete due diligence, structure the deal terms, and then create investment offerings on the crowdfunding site.
Investors will then examine available deals and choose what they want to invest in, with minimum buy-ins. The capital from all investors is pooled to finance the total project costs.
These online real estate platforms aim to simplify real estate investing. They pre-vet and list investment opportunities, handling all paperwork, financing, renovations, and covering rental property basics for the investors who fund them.
A real estate investor can browse listings on the site, assess financials and projections, and invest a chosen amount to own a piece of a property and get paid a portion of rent and profits.
You might find yourself earning from office buildings, apartments, or houses in various places, even countries far away!
What’s great about it is that you don’t need a ton of cash to get started. Some platforms let you jump in with just a few hundred bucks.
Keep in mind that, like any investment, there’s a risk – a project might not take off as hoped. But then again, some can turn out really profitable.
4. Join Real Estate Investing Club
Real estate investing clubs have opened new doors for people, especially new investors keen to try real estate investing without buying or managing a property. They serve as hubs where you can access a blend of learning, networking, and actual investing opportunities.
If you want to check one, I highly recommend SparkRental. They offer not just investment opportunities but also educational courses for both beginners and seasoned investors. Joining the club is also a good way to connect with professional investors, where you can gain mentorship, form partnerships, and learn more about the industry.
Looking For An Easier Way To Invest In Real Estate?
5. Invest in Real Estate Notes
Real Estate Notes offer a different angle on property investment, focusing on the lending side rather than the physical property itself. When you invest in a real estate note, you’re investing in a mortgage or a promissory note – the borrower’s promise to pay back the loan used to purchase a property.
The note specifies the terms of the loan, including the loan amount, mortgage interest, repayment schedule, and the consequences of default.
There are a few key parties in a real estate note transaction:
Note issuer: The borrower who owes money
Note holder: An entity or person who owns the right to receive the note’s repayments
Underlying property: The home/land used to secure the promissory note
The borrower makes scheduled installments to the note holder, including interest, until the total note value is repaid. If default occurs, the property can get seized and sold to pay off the note.
How to invest in them?
Investors can buy existing real estate notes from sellers on note marketplaces. The investor then becomes the note holder entitled to its income stream, typically through monthly interest payments, until the loan is fully paid. When that happens, they receive the note’s remaining principal.
Key advantages of buying notes are predictable cash flow in the form of monthly interest, lower volatility, and collateral backing.
But there’s a flip side. The borrower may default on the loan, or there could be issues with the property’s title. Therefore, investors need to conduct thorough due diligence before purchasing a note.
6. Join Real Estate Syndications as a Limited Partner
In real estate syndications, investors come together to pool their resources, but they do so in a structured partnership. There are two main roles: the limited partners (LPs) and the general partners (GPs).
As an investor, you would typically join as a limited partner. This means you invest your money into the partnership, but your role is mostly hands-off. You’re not involved in the day-to-day management of the investments. Your liability is also limited to the amount you’ve invested.
The general partners, or sponsors, are the ones who handle the management side of things. They’re responsible for identifying investment opportunities, managing the properties, handling the day-to-day operations, and making the big decisions.
Each syndication is a unique project with its own goals and timelines. As a limited partner, your return on investment typically comes from rental income or the profits made when the property is sold.
7. Explore Wholesaling
Wholesaling involves an investor, known as a wholesaler, finding a property, usually undervalued or in need of repairs, and putting it under contract. But here’s the twist – they’re not looking to buy it themselves.
Instead, the wholesaler’s game plan is to find an end buyer (usually an investor looking for a good deal) and assign them the contract.
The wholesaler makes money from the difference between the contracted price with the seller and the amount the end buyer is willing to pay.
Unlike traditional real estate investors, wholesalers don’t need to renovate or manage properties. They simply act as the middleman, making their profit from the contract assignment.
It’s a tactic that relies heavily on market knowledge, negotiation skills, and a strong network of buyers and sellers.
8. Invest in Real Estate Focused Company
Investing in a real estate-focused company means buying stocks or shares in companies whose primary business is related to real estate. These companies are not operating as REITs, and finding them might require a bit more research. They also pay dividends, but these may be lower compared to what REITs offer.
Types of companies in this category include hotel and resort operators and commercial real estate developers. They focus heavily on real estate and offer different investment opportunities in the sector.
No matter what your investment goal is – be it generating cash flow in retirement, saving for a down payment, or simply trying your hand in the real estate market – there are a lot of options available that welcome all kinds of investors without the need to buy or own property.
While not without risks, these real estate investment options allow you to share in profits from rental income, property appreciation, dividends, or interest payments in ways that may be easier and more diverse than owning property yourself.
If you’re new to all this, or if it still feels overwhelming, a smart move is to join an investing club like SparkRental. They can help you understand the ins and outs of investing and steer you in the right direction.
What does it mean to invest in real estate passively?
To invest in real estate passively means you put money into real estate deals without being actively involved, like managing the property or dealing with tenants. You get income and tax benefits but don’t do the physical work.
What is a REIT ETF?
A REIT ETF, or Real Estate Investment Trust Exchange-Traded Fund, is a type of ETF that primarily invests in publicly traded REITs. Unlike mutual funds, which are traded once per day at a set price, real estate ETFs are traded on stock exchanges throughout the trading day.
Are there any risks with passive investing in real estate?
Like all investments, yes – there’s always some risk when you put your money into something for cash flow. The real estate market can change, and so can property values. You will also have limited control over investment decisions.
Plus, specific investments, like REITs or crowdfunding, may have their own risks, such as interest rate sensitivity or project-specific risks. It’s important for investors to conduct thorough research and consider diversification to mitigate these risks.
What are the tax advantages of real estate investing?
Some key tax advantages are depreciation deductions, deducting expenses related to rental properties, not paying capital gains tax when doing a 1031 exchange, writing off travel expenses when visiting investment properties, and avoiding taxes on profits if you invest through a self-directed IRA.