Real estate is one of the most popular and profitable investment opportunities in today’s world. Surveys taken by real estate trackers suggest there are 28 million US investors in residential real estate alone. Commercial real estate investing is also popular and lucrative, although much more complex.
Although there are not as many commercial investors, as there aren’t as many commercial opportunities as there are residential, it does draw a certain type of investor—one who is more comfortable taking risks. There are other ways to invest in commercial real estate without great risk and without learning all the complexities of commercial real estate investing, and we will take a look at those opportunities.
For thousands of investors, the idea of owning rental properties, executing leases and collecting rents, finding reliable property managers, running credit reports and background checks, finding reliable and trustworthy tenants and dealing with the legal aspects of evictions, isn’t quite appealing. The responsibilities and liabilities of having tenants can keep many want-to-investors away, but there are ways to get in on the investment cash stream without screening a single tenant.
Not only are the responsibilities of renting discouraging, but the cost of purchasing can also exclude those who don’t have the cash flow to make the required downpayment and pay the closing costs. Add to that the taxes and other expenses, such as utilities and homeowners insurance, it can be cost-prohibitive, especially for those just starting out.
For those who want to invest without buying property, there are several ways to do it without forfeiting access to your capital. Best of all, you don’t need to be a millionaire to hold a nice portfolio, and there are options to get you started with as little as $1,000.
1. Real Estate Investment Trusts
Real Estate Investment Trusts (REITs) are company-owned or financed, income-generating properties that are most often traded on major stock exchanges. They are dividend-earning investments, generally in commercial buildings, retail, medical facilities, cell towers and multiple dwellings, such as apartments and hotels. This provides the opportunity to invest in commercial property with less risk and without the need to learn all of the ins and outs required to make sound investments.
Among the benefits of REITs is that you don’t have to tie up your capital for the long-term. As with any stock, you can cash out at any time. What makes REITs attractive is that they must pay out at least 90 percent of their taxable income to their shareholders, meaning those who invest will have a steady dividend income stream.
You can invest in a diverse portfolio of REITs to reduce your portfolio risk. Historically, they do have a good track record and are much more stable than other types of stocks and bonds.
Different Types of REITs
There are several options to choose from when investing in REITs. The most common is Equity REITs. They are publicly-traded and are known in the market as simply REITs. Equity Real Estate Investment Trusts are owned or operated revenue-producing real estate. You need not do anything more than to invest and collect the dividend checks.
mREITs, also known as mortgage REITs, are used to finance income-producing real estate by purchasing mortgages. Income is generated from the interest of the investments.
Private REITs are exempt from SEC registration. Shares aren’t traded on national stock exchanges. Public non-listed REITs, however, are registered with the SEC, but they aren’t traded on national stock exchanges.
2. Real Estate Mutual Funds
Real Estate mutual funds are similar to REITs, and can actually be an investment in them. Mutual funds are professionally managed pooled investments. Generally, the investments are industry-varied with stocks, bonds, and REITs or real estate related stocks. You can manage a combination of mutual fund options with varying risk levels.
Both REITs and mutual funds have risks but can yield good dividends with proper planning. The advantage of both is that they don’t require a large amount of money to get started.
3. Real Estate Crowdfunding
Real estate crowdfunding is a relatively new concept that began in 2012 with the passage of the JOBS Act. Crowdfunding is simply the pooling of money for a common purpose.
Better explained, say, for example, a real estate developer wants to construct a multipurpose, multimillion-dollar convention center. Rather than approach one investor, he crowdfunds by reaching out to many investors. What makes real estate crowdfunding unique is that it’s done online. This gives the developer a much larger audience and an easier-to-reach platform for finding investors. Most often, the projects are offered through a crowdfunding agency, and you’ll want to thoroughly vet them before handing over your money.
One of the advantages of real estate crowdfunding is that it can be done with minimal investment and the investor can choose what projects to put their money into. The investor will have access to the developer and can have a say in the process.
There are risks, and it can be riskier than mutual funds or REITs, but with crowdfunding popularity, it appears to be a great place to begin an investment portfolio. If too many investors were losing money, it wouldn’t remain as popular today as it is.
Real estate wholesaling is simply property-flipping with no intention to actually own the property. It works by an investor purchasing property, most often houses, and quickly selling it to another investor at a higher price. Most often, the second investor buys the property to renovate and hold to rent out for profit.
Some flip houses to first-time homebuyers who are looking for an inexpensive starter home that they can renovate over time.
For the wholesale investor, it’s a quick way to make a profit with a small investment. Many wholesalers take advantage of municipal auctions, where properties are sold to the highest bidder, often for the price of the taxes owed. Municipalities will put on their websites a catalog of properties to be sold at auction. This does require cash-on-hand for purchase; however, most auctioneers only require a small downpayment with the balance due within 30 days.
Wholesaling can be very lucrative for investors who know where to find interested buyers. It’s possible to make $5,000 to $10,000 per month by buying distressed properties and flipping them. It does take work to find the right properties to flip, but it remains one of the most popular methods of investing in real estate without having to own the property. You will need to buy it, but often you can do so for the amount of taxes owed so you aren’t technically buying the property, you’re simply paying off the owed taxes.
5. Tax Liens
When searching online for real estate investments without being involved with actual property ownership, you likely came across tax lien investing. This is probably one of the riskiest investments there is, and you could end up owning and having to dispose of distressed property. For this reason, it isn’t recommended, but for those willing to take the risk, it can pay off.
Tax liens are offered at auction in a few states, and you need not be present when the properties are on the auction block. There are brokers who will make the purchase for you. They are appealing to those who don’t want to own property because you are only buying the lien, not the actual property. When the lien is paid off, you make a profit. But it’s not that simple.
The risk is when the lien isn’t paid off and you’re stuck with the property. This can result in a large investment deficit. Some tax lien investors trusted brokers to make lien purchases but never checked the properties they held the liens for. They would later learn they owned dilapidated houses in the worst part of a town, land that can’t be developed, or houses that violate a municipality’s code and fines have piled up.
You can quickly lose any profit you’ve made if you have to foreclose on the lien. Keep in mind that many of the properties are distressed and the owners only want to be out from under them. Some are in such rough neighborhoods that renting them to decent tenants is impossible, and the money it would take to fix up the property might be cost-prohibitive.
We’ve included tax lien investing because when properly vetted, it can be a good way to receive a return on investment without property ownership, but make certain to work with a reputable broker and know just what you’re getting into. Remember, too, that you will be paying someone to oversee the liens for you, and those costs can add up. It’s difficult to determine the return on investment (ROI) because you don’t know how long you’ll be holding the lien and if it will be redeemed. The ROI is made when the lien is redeemed.
Whether you’re entering the real estate investment world with $100 or $100,000, there’s an opportunity to make a profit without ever spending one dollar on the actual purchase of real estate. Although home sales are predicted to slow somewhat in 2020, real estate investing will continue to be a popular and profitable investment.
Before making any investment, do your homework and study the market. Always ensure you’re working with reputable people, especially if you choose to invest in crowdfunding. Never invest more than you can afford, and if you can’t afford to tie up your cash, be sure to invest in a real estate market that will allow you access to your funds if you need it.