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 six of our favorite tips for people wondering how to invest in property without buying a house.
A real estate investment trust (REIT) is a company or other form of incorporated business that owns, operates or provides financing for real estate intended to produce income. Many REITs are traded on exchanges, which makes it easier to sell your stake in the investment if you need to access your funds.
In order to be classified as a REIT, the company has to comply with IRS provisions that require that most of its earnings come from income-producing properties along with distributing the majority of that income to shareholders in the REIT. In this way, the idea is to generate a stream of cash flow for investors.
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 a 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.
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.
ETFs have a few major benefits:
- Because you’re buying into a fund, the buy-in isn’t as high as if you were to invest in a crowdfunding project. The ability to invest in relatively small amounts can make this a good starting point for people who want to dip their toe in the real estate market, even if they don’t make much money at the moment.
- Because they’re traded on exchanges, ETFs are fairly liquid assets, meaning it’s fairly easy to sell your stake for cash if you need the money down the line.
- There’s a whole portfolio of properties underlying ETFs, so your investment isn’t overly exposed if one project doesn’t work out.
Two of the more popular real estate ETFs, based on both their average return and expense ratio, are the Vanguard REIT ETF and iShares Global REIT ETF.
The Vanguard REIT ETF 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 ETF 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.
The benefits of a real estate mutual fund are as follows:
- A real estate mutual fund could help investors to diversify portfolios by getting into real estate instead of overexposing yourself to other areas of the stock and bond market. The more diversified your portfolio, the less exposure to risk based on the ups and downs of any one sector.
- While you have to wait until the end of the day, funds can still be traded on relatively short notice. This makes it easy to get in and out of investments when you need to.
- You also have the ability to get into both commercial and residential real estate mutual funds depending on your particular investment appetite.
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 Crowdfunding
You might have heard the term “crowdfunded real estate” 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 individual investor option, that’s where you would come into the picture.
With real estate crowdfunding, a large group of people invests 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'll be able to invest in these real estate deals directly. If not, you'll need to invest in funds that invest in the properties.
So, what makes you an accredited investor? Under rules set by the Securities and Exchange Commission, 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 2 years.
If you are an accredited investor, there are several real estate crowdfunding websites available. Fundrise and Realty Mogul are two of the better-known ones. Both have 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 REIT that invests in the property. This allows you to get your feet wet and requires a much lower minimum 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.
If you’re looking to invest in a builder, it could be as simple as investing in the stock of one of the publicly traded builders above. The benefit here is that getting in and out is as easy as buying and selling stock.
Another opportunity would be to work with a builder in your local area who’s looking for sources of capital. The opportunity here is that because you’re staking projects, you may be able to work out a deal for more than 10 just returns from the builder in exchange for the increased risk you’re taking. Working with local builders also ensures that your investment stays within your community, potentially creating jobs and a local economic boost.
When evaluating whether an investment in home construction makes sense for you, there are a couple of things to take into consideration:
- What’s the state of the overall economy? If people think things are generally going well and they see good things on the horizon, they’re more apt to go after their long-term goals, which often include buying a home of their own. A home is seen not only as a place to stay and entertain, but as a vehicle for generational wealth.
- Consider the market. Some cities are up-and-coming in terms of housing and have the potential for higher returns than others. Take a look at our list of the best cities for real estate investing.
Investing In Real Estate-Focused Businesses
The final avenue to invest in real estate that we’ll be going over is investing in one of the many businesses working in and around the real estate sector. While this could include those engaged in constructing and flipping houses as well as owning and operating properties, there are also options to get into a real estate adjacent support sector.
AI and big tech are really everywhere at this point. Real estate is no exception. Companies have sprung up with software that helps bring the latest data insights to property valuation. For example, you could get in on the ground floor of the next great app to help manage landlord-tenant relationship. It doesn’t really matter what it is. The point to take out of this is that real estate doesn’t just have to mean building houses and apartments.
You should consider this option if you have an idea for a service to serve the real estate industry or know of one you can get involved in backing along with no shortage of confidence in the business plan and the housing market.
This confidence in your investment is important. While direct investment in a business can lead to higher returns than other investment options like REITs, it also typically comes with a higher upfront investment and the additional risk. If the venture you invest in goes belly up, you may not get the investment back. This isn’t the investment option for the faint of heart.
Recapping The Many Ways To Invest Without Buying Property
Although the predominant way to invest in real estate is to buy a house, it’s by no means the only way to get involved in the sector. Options like REITs, ETFs and focused mutual funds can enable you to get into real estate with a relatively low upfront investment while maintaining an investment strategy that allows your funds to remain liquid.
Meanwhile, other options like crowdfunding, backing home construction and investing in real estate focused businesses may offer higher returns, but there is somewhat more risk involved, so you need to know what your tolerance is.
Before undertaking any particular investment strategy or combination thereof, we highly recommend taking stock of your personal situation and speaking with a financial advisor.
We hope this has helped you understand a broad spectrum of real estate investment strategies. For even more tips and tricks, check out the Quicken Loans® investing archives for more information on managing your finances.