Purchasing real estate is a lucrative investment strategy. It provides numerous advantages over other forms of investing like tax benefits, capital appreciation, and less volatility. In fact, it is currently the most preferred long term investment method among Americans.
Despite this, there are many challenges that come with owning property - the cost of a down payment can be intimidating, taxes can be steep, and you will have to maintain the property.
So what if you want to have a stake in the real estate game but buying a house is too expensive or you don’t want to deal with the hassles of being a property owner? Thankfully, there are other ways you can add real estate to your investment portfolio without actually having to buy a property. Here are four ways you can make it happen.
Real Estate Investment Trusts (REIT)
A real estate investment trust (REIT) is a company that owns, operates or finances income-generating properties. They allow individuals to invest in large-scale real estate by selling shares of their company. Properties in a REIT portfolio can range from apartment complexes to health care facilities, hotels, shopping malls, and office buildings. The different real estate classes each REIT invests in lets you diversify your holdings.
Unlike other real estate companies, a REIT does not develop properties to resell them. Instead, they buy and develop properties to function as part of their own investment portfolio. The company will lease space and collect rent on the properties, then distribute the income to shareholders.
Some REITs are traded publicly and listed on a major stock exchange. Others are non-traded, and shares can be bought through a broker that participates in the company’s offering. They can be a great investment because they offer the income potential provided by real estate and the liquidity of stocks!
Real Estate Mutual Funds
In a real estate mutual fund, an investment company pools together money from clients and invests in real estate on their behalf. Mutual fund investors own a share of the mutual fund and earn returns as dividends and share appreciation. The fund is professionally managed by the investment company and can usually be converted to cash in one day if you decide to sell.
Real estate mutual funds typically invest in REITs, real estate stocks, and sometimes actual real estate. Each mutual fund will have its own level of diversification, invest minimum, and fee structure.
If your goal is long term investing, mutual funds can be a more practical alternative to REITs. REITs are required by the IRS to return all profits back to investors annually, meaning that the profits are subject to federal tax. Profits earned from a mutual fund will remain in the fund unless you decide to sell.
Real Estate Exchange-Traded Fund (ETF)
People invest in Real Estate Exchange-Traded Funds (ETF) for the same reason they invest in REITs and mutual funds; they want to invest in real estate without holding physical property. A Real Estate (ETF) is a type of fund made up solely of REITs and REIT stocks. Many well-known companies such as Vanguard and Charles Schwab create real estate ETFs that you can invest in. One advantage of this type of investment is that each REIT ETF holds numerous REITs, so investors are protected from losses if one property fails.
With REIT ETFs, one low-cost investment can allow you to invest in a diverse range of properties. They too are bought and sold like shares of stock on the stock market. Companies that create and manage ETFs will provide you with information to determine whether or not it is a good investment.
A mortgage note is a loan from a bank or financial institution that is secured by a piece of real estate. Financial institutions and individuals sell mortgage notes to free up their cash flow. Investors pay for the remaining debt on the note and collect the borrower’s principal and interest payments in return. Mortgage note investors essentially step into the shoes of the lender upon purchasing.
While many mortgages are sold at full price, others can be bought at a discount. If the loan is non-performing, or the note holder needs to quickly access cash, they can be sold at a lower rate. It is very important to thoroughly review the borrower before purchasing to assure that they are not likely to default. This includes looking into their credit history, income, down payment amount, and payment history.
You don’t need to be a millionaire to invest in your first mortgage. The Tellus superapp allows you to get started for as low as $200! You can invest in fractions of different residential mortgages, allowing you to diversify your portfolio across multiple properties.
Those looking to invest in real estate can do so without purchasing a property. The forms of investing mentioned above are an alternative if you want to limit your investment, level of risk, involvement in management, and have greater liquidity. All of them are largely influenced by the same economic factors that shape the real estate market. Nonetheless, they can be a great way to get your foot in the door of real estate investing. With the proper research and planning, positive cash flow may be just around the corner!