Mixing a variety of investments is key to having a successful portfolio, and real estate is a great way to help boost that diversification. Unfortunately, purchasing real estate can be expensive when you consider the down payment, monthly mortgage payment, insurance and maintenance. Plus, a lot of people don’t want the headaches that can come from being a landlord.
Luckily, there are many ways you can invest in real estate without actually dealing with tenants. Here are five of our favorites.
Real Estate Crowdfunding
You might have heard the term “real estate crowdfunding” but not really understood it. Here’s one way to think of it:
Assume real estate developers decide to build an apartment building. They have a couple of options: They can either secure financing through a lender like a bank, or they can turn to a group of individual investors. If they choose the investors, that’s where you would come into the picture.
With real estate crowdfunding, a large group of people invest in a specific project. However, the way you are allowed to invest depends on your net worth.
If you are an accredited investor, then you will be able to invest in these real estate deals directly. If not, you will need to invest in funds that invest in the properties.
So what makes you an accredited investor? You would need a net worth over $1 million (not including personal property) or an income of at least $200,000 ($300,000 for married couples) for each of the past two years.
If you are an accredited investor, there are several real estate crowdfunding websites available. and Realty Mogul are two of the more well-known ones. Each has many deals available. Just be aware: There are a limited number of investors allowed for each, and the minimum investment can be high.
If you don’t meet the requirements to be an accredited investor, there are still ways to invest with crowdfunding. Instead of investing in the property directly, you would invest in a Real Estate Investment Trust (REIT) that invests in the property. This allows you to get your feet wet and requires a much lower minimum investment.
Real Estate ETFs
Another option when looking to invest in real estate without owning property is an ETF. An ETF, or an exchange traded fund, is a group of stocks or bonds packaged together into one fund. Most real estate ETFs are made up of companies that invest in stocks issued by REITs.
Two of the more popular real estate ETFs, based on both their average return and expense ratio, are the Vanguard REIT EFT and iShares Global REIT EFT.
The Vanguard REIT EFT covers 184 U.S. REITs with a focus on residential, commercial and health care. If you’re looking for exposure to the international real estate market, then the iShares Global REIT EFT would be a good fit. This fund is made up of 60% U.S. REITs, but also includes properties in the U.K. and Australia and in developed countries such as Japan and France.
Real Estate Mutual Funds
Real estate mutual funds are similar to ETFs. But unlike an ETF that can be actively traded throughout the day, a mutual fund can be bought or sold only at the end of the day, based on its net asset value (NAV) price.
Two of the bigger downsides when comparing a real estate mutual fund to an ETF are the expenses and minimum investments. Mutual funds tend to have slightly higher expense ratios, which will lower your overall return. Plus, they typically require a higher minimum deposit.
A popular choice is the T. Rowe Price Real Estate Fund. This fund has an expense ratio of 0.73% but since its inception in 1997, it has an average yearly return of 9.39%.
Real estate ETFs and mutual funds consist of many different REITs packaged together. But if you’re looking to invest in real estate without buying property, you could also choose to invest in individual REITs.
Adding an REIT with several property classes can help diversify your portfolio. Just make sure you’re always investing in publicly traded REITs like General Growth Properties. Private REITs can have issues with liquidity, making it harder to sell your investment.
If you want to think outside the box, you could choose to invest in home construction. Instead of investing in actual properties or a group of properties, you are investing in the builder.
Even though much of the country has rebounded from the housing crisis, many places still have a problem with inventory. That means builders are likely to be busy for several years. There are several publicly traded builders, including D.R. Horton, Lennar, Pulte and Taylor Morrison.
Have you invested in the real estate market without actually owning property? Let us know in the comments.
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