10 Ways to Invest In Real Estate Without Buying Property
While we all know how profitable it can be to invest in real estate, and how important it is for portfolio diversification, most of us simply do not have the time to buy and manage real estate on our own — nor do we all always have the funds or credit to invest on our own.
Investing in real estate on your own can be a massive hassle and take a lot of funds and effort that if you have a full-time job, or business, likely isn’t worth the effort for you to engage in on your own — not to mention requires lots of due diligence, research, patience, etc, that aren’t required when investing without buying property.
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Real Estate Investment Trusts (REITs)
REITs are the most obvious choice most of us are already aware of — they’re a good choice for those looking to invest in real estate without management hassle as reits offer many benefits including:
- Easy and efficient taxation of gains and income
- less risk than direct ownership due to their management teams
- Easy diversification compared to self-owned real estate
REITs are investment vehicles that allow investors to buy shares in companies that invest in real estate exclusively and rent out the properties on investors behalf — they’re legally obligated to distribute the majority of rental income to investors, making them ideal for retirees and income-seekers. Non-US residents/citizens will have limited tax-efficient options in the REIT space — for Europeans you’ll likely need to look to the UK market for good REITs and for the rest of the world (ex-US) you’ll likely want to stick to Singapore-listed REITs for tax reasons.
REITs are non-correlated with other investments and traditional stock investments in general, and are excellent for retirement accounts as the dividends they provide can be reinvested tax-free and automatically, often every single month thanks to many reits monthly dividends.
Invest In A Company with lots of Real Estate Exposure
Another option is to buy shares in a company that has a large exposure or involvement in real estate, but aren’t solely focused on real estate like REITs are. You may not be familiar with these types of companies but some of the largest companies like Blackstone and Colony American Homes focus heavily on real estate, owning lots of it their self, but not being solely reliant on the rental incomes they produce to sustain the business.
Other stocks like this that you likely wouldn’t think would be in this category are hotel operators like IHG and Marriot, as while they don’t own much real estate they benefit from appreciation in room rental rates, as well as McDonalds which while being a restaurant business exclusively operates on properties they own, giving them substantial amounts of real estate exposure.
Invest In The Construction Industry
Construction is one of the most lucrative investments because it provides easy returns and can be an excellent hedge against inflation. If you’re thinking about how to invest in real estate, construction is an industry that is directly linked to the real estate industry and you can easily opt to invest in construction companies rather than real estate.
The best way to do this is to invest in publicly traded homebuilders, but you can also opt to invest in material producers such as lumber and cement producers as a proxy for construction companies their self. When investing in homebuilders you not only get cash-flow of a profitable business, but you also gain exposure to the real estate market in general as homebuilders generally hold quite a bit of land and homes that are yet to be sold.
On average, your return on investment will range anywhere from 5-20 percent depending on the year when investing in construction. In 2015, the U.S. residential construction sector was valued at around $1.4 trillion. For comparison, this is double the size of the U.S. economy as measured by GDP.
Real Estate (REIT) ETFs
An alternative to purchasing individual stocks or other securities is to invest in an exchange traded fund (ETF). An ETF gives you access to a collection of different assets such as companies, commodities, currencies, etc — in this case the ETF you’d be investing in if you opt for this route is something like VNQ which invests in primarily US-based real estate companies on your behalf.
As with any investment, there is no guarantee that an ETF will perform well for you — however, ETFs often provide diversification benefits over individual stocks the average investor selects. These funds own the underlying assets (reits) their self and management the allocations on your behalf, ensuring proper diversification. Usually REIT ETFs hold between 100 and 200 different reits, making their diversification exceptional.
Hard Money Lending & Loans
Hard money loans are an alternative way to invest in real estate and offer high interest rates for lenders/creditors, often around 10% to 20% annually or more if someone doesn’t have a long history of successful hard money loans — but of course this carries significantly more risk than other options mentioned here.
With a hard money loan, there is little to no recourse if the borrower defaults, as generally if they’re defaulting they’ve lost all the money the have pursuing a bad property remodel project — and if that happens it’s just as much your fault as theirs, as it’s the lenders job to vet the project just as much as the borrower when it comes to hard money lending and loans.
Invest In Online Real Estate Platforms:
Websites like Streitwise or Fundrise let you invest into real estate without getting your hands dirty — they’re like mutual funds or REITs but without the beaurocracy and fees that come with being publicly traded. Yieldstreet is another good option, however most of their offerings are only available to accredited investors.
When you invest in such websites your money is pooled with cash from other investors who take advantage of the platform, and then the platform buys real estate in the selected areas specified in the fund offering you chose to allocate your funds to, or the specific type of real estate, then they manage the property on your behalf generating rental income — generally such platforms return around 8% to 14% annually depending on the year — a couple percent higher than REITs in general.
Employ A Property Manager
While not exactly being ‘without buying property’ the main reason people don’t want to buy real estate their self is property management — you can outsource this to a property management team that charges a few percent of rent as a fee, making the investment entirely hands-off after you’ve purchased the property.
Property managers take care of everything involved in running a rental property — they collect rents, pay bills, maintain the property, market the property, and handle tenant relations, as well as find tenants for you. If you want to invest in a particular part of the country this is generally the best way to do so while not having the hands-on hassle that property management comes with.
Invest In Real Estate Mutual Funds
Mutual funds are one of the easiest ways to invest in real estate — they’re similar to ETFs but more managed and respond to market conditions — trading in and out of stocks within the fund depending on the fund managers outlook.
Generally mutual funds underperform ETFs, however if you find a fund manager who has similar assumptions as you do they can be good investments — it’s just you have to actually research what the funds goals are, not just assume they’re alined with your investment goals because they hold some individual reits you already own. Fees are largely not that much higher than regular REITs contrary to what many people assume — often being 1% or less.
Real Estate Notes or Liens
Real estate notes are investments that allow investors to purchase debt at low rates. You can invest in them by purchasing debt directly from banks. Due diligence should be conducted before investing in these types of notes. The interest rate on this type of note will fluctuate based on market conditions — but generally a few percent above the ‘prime rate.’ In 2020 and 2021 the rates were around 4% on such notes and in 2022 they were around 5% to 7% depending on the offering.
Tax-Liens are another option, however we believe it’s important to stress that tax liens aren’t all they’re cut out to be online — they used to be fantastic in the early 2000s but now they’re unlikely to return more than a few percent annually and you’ll almost never get a house out of them. They’re really a special thing to opt for in economic turmoil — when a recession happens you may want to consider tax-lien investing in the following few years, otherwise it’s not at all worth the bother.