7 Ways to Invest in Real Estate Without Buying Property in 2020
Financial advisors and investment professionals have increasingly recognized the value of diversifying beyond stocks and bonds in investment portfolios. For investors looking to add exposure to alternative asset classes, real estate is a popular choice. The misconception that real estate investing requires property owners and large commitments of capital prevents many investors from pursuing the lucrative opportunities real estate has to offer. Fortunately, there are a number of ways investors can gain exposure to the sector that don’t involve owning property.
Invest in Real Estate Investment Trusts (REITs)
A Real Estate Investment Trust, or REIT, is a company that owns and typically operates a portfolio of income-producing real estate. Investors purchase shares in the REIT, allowing them to profit from their underlying assets without having to buy or manage the properties themselves. REITs are an attractive option for income-focused investors seeking healthy dividends: By law, REITs must distribute at least 90% of their taxable income to shareholders as dividends each year. Most REITs are publicly traded, making them highly liquid – in contrast to the majority of real estate investments.
Invest in Real Estate Mutual Funds
Real Estate Mutual Funds differ from REITs in that, whereas a REIT is an actual company that operates in the business of owning and managing properties, a mutual fund is an investment vehicle that pools together and oversees investments on behalf of its clients. Mutual fund investors own shares of the fund, while the fund owns the assets in which it invests. In contrast to private equity funds, which invest in illiquid, private assets, mutual funds generally hold investments in publicly traded securities such as REITs and real estate stocks. As with other types of mutual funds, investors can select amongst growth-oriented and income-oriented funds.
Invest in Real Estate ETFs
An exchange-traded fund, or ETF, invests in a collection of REITs. They are publicly traded and can be bought and sold like stocks, offering superior liquidity to private real estate investments. The key difference between ETFs and mutual funds is in how they are managed. ETFs are passive investment models that aim to track the return of a specified market index, such as the MSCI US Investable Market Real Estate Index, while mutual funds are usually actively managed and attempt to outperform a benchmark index. ETFs tend to have lower fees than mutual funds, reflecting the lower cost of being passively managed.
Invest in Real Estate Private Equity Funds
Like mutual funds, private equity funds pool together money from investors and make investments on behalf of their clients. The key difference is that, whereas mutual funds typically limit their investments to publicly traded stocks and REITs, private equity funds invest in the private real estate markets, typically acquiring direct ownership in properties. PE funds usually operate through a limited partnership structure with a management group acting as a general partner responsible for operating the fund and managing investments. Lack of liquidity means that private equity real estate investing is usually riskier, however, it often generates higher returns by providing access to niche markets and opportunities to profit from strong price appreciation.
Use an Online Real Estate Investment Platform
Online investment platforms source money from large groups of individual investors and invest in opportunities that otherwise may not be feasible due to the costs necessary to purchase large properties. These investments are most commonly part of crowdfunding and allow investors to access real estate without requiring venture capital. Online investment platforms vary significantly in investment strategies, property types, time horizons, and investment offerings, and as private equity investments, they generally offer little liquidity throughout the investment’s holding period.
Invest in Real Estate Service or Construction Companies
There are a variety of publicly traded companies that operate in the real estate sector, ranging from service companies to commercial developers and homebuilders. Investors can acquire shares of these companies as they would a REIT, gaining access to domestic and global real estate markets at relatively low cost. This option suits investors seeking exposure to a specific type of real estate investment and who has time to research company history, financial data, and other information.
Wholesaling real estate is a form of property-flipping that does not require property ownership or up-front maintenance costs. In a wholesaling arrangement, an investor enters a contract with a seller to buy a property that they believe is undervalued and then attempts to quickly sell the property at a higher price, pocketing the profit. Wholesaling is a risky process that requires specialized knowledge of real estate markets and legal proceedings, as well as contact with a large network of potential buyers. If the wholesaler has trouble finding a buyer, he stands to lose significant money on his investment.
Deciding What’s Right for You
There are a variety of ways in which investors seeking exposure to real estate can invest in the sector without having to own property, commit exorbitant sums of capital, or deal with the daily stresses of property management. The real estate investments discussed in this article can potentially boost portfolio return while simultaneously decreasing risk through diversification, however, it’s up to the investor to decide which option is most appropriate given his or her investment goals and risk constraints.