How To Invest in Real Estate Without Buying Property
Financial vehicles like real estate mutual funds and crowdfunding help remove the barriers of entry to becoming a real estate investor and building your own investment strategy. This means purchasing physical property, such as land or an apartment building, is no longer a requirement to begin investing in real estate.
Thanks to modern technology, investors of all incomes and experience levels can now take advantage of the opportunity to make real estate investments in both the short-term and long-term.
Find out how to invest in real estate without buying property.
What Are the Different Investment Vehicles in Real Estate?
From real estate investment trusts (REITs) to bonds, there are multiple ways for an individual to get started in real estate market investing without purchasing a house or another form of property. Each investment vehicle comes with its fair share of risk, though some, like certain crowdfunding avenues, carry a higher degree of risk than others.
An initiative launched in 1960 by Congress, real estate investment trusts (REITs) simplify the process for a citizen to become a partial owner of sizable real estate properties that generate income. Among the real estate stocks that individual investors could invest in and receive dividend payments for are resorts, office buildings, and storage facilities.
The U.S. Securities and Exchange Commission (SEC) regulates REITs with strict guidelines. For example, the distribution of dividends to investors has to amount to 90 percent or more of a REIT’s annual taxable income. Additionally, 95 percent of the trust’s gross income must come from dividends or interest and sources related to real estate.
Development or Home Construction Companies
It is possible to invest in and profit from development and construction companies involved in building neighbourhoods and real estate properties. Do your due diligence before diving into any investment, especially companies involved in construction. Become familiar with trends and the essentials of real estate development.
For example, examine whether or not the company aims to develop residential or commercial structures in a highly desired or up-and-coming geographical area. This factor, along with unpredictable economic circumstances like a recession or high inflation, could affect the profitability of your investment in the company down the line.
Real Estate Mutual Funds
Usually managed by professional fund managers, mutual funds consist of an investment pool where multiple investors put their money into a combination of bonds, REITs, stocks, and other financial vehicles. An individual or institutional investor often buys into a mutual fund in order to achieve portfolio diversification.
In addition, certain mutual funds may also pay out a dividend or interest payment on a periodic basis. For example, the mutual fund Vanguard Real Estate Index Fund Admiral Shares, which has a ticker symbol of VGSLX, pays quarterly dividends to its investors. As of September 2022, the dividend distribution amounted to $1.29880 per share.
Real Estate Exchange-Traded Fund (ETFs)
Real estate ETFs share similarities to mutual funds, but there are distinctions between the two when considering expense ratios and management styles. An expense ratio indicates a fund's operating costs per year, which can include portfolio management expenses. Many ETFs are passively managed, resulting in a lower expense ratio compared to mutual funds with an active manager.
Crowdfunding is a relative newcomer to the world of real estate investment. Considered a higher-risk form of investing, crowdfunding involves investors pooling their monetary resources to finance existing or prospective projects in real estate, such as commercial retail space or a residential property.
Such an initiative takes place on platforms like CrowdStreet or Fundrise — which are effectively REITs — dedicated to real estate crowdfunding campaigns. An investor can contribute to a real estate crowdfunding project with less than $100, depending on the platform or developer’s conditions. CrowdStreet, for instance, requires a minimum investment of $25,000 from exclusively accredited investors.
Real Estate Bonds
A fixed-income financial asset backed by property, real estate bonds allow investors to collect interest payments until the bond matures. To purchase a real estate bond, an individual or institutional investor often has to go through a broker.
When the bond has reached its maturity date, which is when an investor can receive their principal, the investment generally dissolves per the terms of the agreement. The property that backs the bond could involve a residential complex, a commercial building, or another piece of real estate altogether. Compound Banc is a leading expert in real estate bond investment.
Which Type of Real Estate Should I Invest In?
The primary types of real estate properties are commercial, undeveloped land, industrial, and residential. Businesses tend to use commercial real estate in the form of parking lots, hotels, shopping malls, and more. In terms of undeveloped land, this type of real estate refers to the foundation on which physical property is built.
As its name implies, industrial properties include structures for industrial purposes like warehouses, factories, and transportation hubs. Lastly, residential real estate encompasses the structures where families and individuals reside, which include single-family homes, apartments, and condos.
When vetting which investment option is best, consider your financial goals and conduct research on each current or prospective development and the construction company behind it. Evaluate the risk compared to the return on investment. Make an informed decision to nurture your financial health and potentially elevate your net worth.
Do I Have To Own Real Estate To Invest in Real Estate?
As demonstrated by the previously mentioned investment vehicles, it is not necessary to take out a mortgage or put a down payment on a house or other type of single property to invest in real estate. However, there are both advantages and drawbacks to investing in real estate by purchasing a house and turning it into a rental property. One benefit of a home-owning investor is that the property could open up a stream of passive income if it’s rented out for a profit.
On the other hand, the downsides of homeownership involve finding suitable renters who will pay their dues on time and take proper care of the house. Maintenance costs may also add up, depending on the issues that arise like leaky faucets or damaged exteriors caused by extreme weather. These upkeep expenses potentially outweigh the cash flow generated by rent income, though homeowners can use tax deductions if this occurs.
How Much Money Should I Have To Make a Real Estate Investment?
An individual can begin investing in different types of real estate with as little as $10 for certain bonds or crowdfunding projects. Keep in mind an investor needs to evaluate their financial situation and goals before making any kind of investment due to the risks involved. They should ideally only put in as much as they are willing to lose since investment companies or development projects are ever changing.
3 Key Takeaways of How To Invest in Real Estate Without Buying Property
From real estate mutual funds to bonds, there is an abundance of information to take in about investing in real estate.
Here is a summary of the fundamentals of real estate investments:
1. Many Methods Exist in Which To Invest in Real Estate.
More conventional ways include investing in REITs, bonds, or mutual funds. Meanwhile, those with a higher risk tolerance may opt for crowdfunding and directly financing home construction companies, which potentially yield a worthwhile return on investment.
2. Buying a House or Property Is Not a Prerequisite to Real Estate Investing.
With the demands of lenders and creditors, it is difficult to qualify for a mortgage to purchase a house or large-scale property. The good news is modern real estate investing no longer requires an individual to own a physical property.
3. An Individual May Be Able To Invest Even With a Lower Income.
In the past, often only the wealthy could afford investments in real estate assets. Thankfully, these days, investors need as little as $10 to diversify their portfolio with commercial, industrial, residential, and other kinds of real estate investments.
How Can Beginners Invest in Real Estate?
Advanced financial technology companies like Compound Banc provide even entry-level investors the opportunity to generate income from real estate. Offering real estate bonds that start at $10 each, Compound Banc makes investing in real estate bonds simple and convenient with a secure, user-friendly app.
In addition, every bond purchased through Compound Banc empowers the investor with a fixed 7 percent annual percentage yield (APY), effectively creating a passive compounding income stream that’s sustainable in the long run. Investments remain liquid as well, with investors able to withdraw their money whenever they want at their discretion.
With no hidden or maintenance fees, Compound Banc is how savvy investors can potentially grow their net worth through property-backed assets. Join Compound Banc today to get started on your real estate investment journey.
The Reality of Investment Risk | FINRA
Investor Bulletin: Real Estate Investment Trusts (REITs) | Office of Investor Education and Advocacy
Perform Due Diligence | International Trade Administration
Crowdfunding & Regulations - Fintech: Financial Technology Research Guide | Library of Congress
Tax Credits and Deductions | USA