There are a lot of reasons to invest in real estate: a growing industry, good profits, a variety of options, but there’s also a lot of downsides: managing tenants, construction deadlines, a large amount of up-front capital, and stringent regulations, just to name a few. However, investing in real estate doesn’t just mean you have to purchase a physical property. If you want the benefits of real estate without the headache of owning multiple properties, you have plenty of investment options.
Here are a few of the best ways to get involved in real estate without putting your name on a new title. As always, be sure to consider your budget, investment style, and local economy before making an investment decision.
Real estate investment trusts own and manage many different kinds of real estate assets and often come with a variety of investment strategies. To qualify as a REIT, a trust must invest at least 75% of its total assets in real estate, get at least 75% of its income from rent or mortgage interest, and have a least 100 shareholders within its first year. REITs can focus on different areas of real estate, including shopping centers, student or multi-family housing, or new home construction.
Similar to how a mutual fund operates, REITs allow investors to buy and sell real estate securities, either on a public exchange or via a private investment, depending on the structure of the REIT. REITs are required to pay out a minimum of 90% of taxable income in the form of dividends to shareholders, which means that investors are essentially guaranteed cash flow. Investing in a REIT can be a good starting spot for real estate investment, as it allows you to grow your portfolio, potentially to a point where you can purchase property yourself.
Real Estate Mutual Fund
Investing in a mutual fund allows you to diversify, which can be a difficult task in other real estate investment options. There are a variety of real estate-centered mutual funds available: some focus on real estate stock, REITs, or real estate-focused companies, while some even allow you to invest in direct real estate purchases under a traditional mutual fund model. With such a variety of real estate mutual funds, you can choose the investment that is best for you, including where the properties are located (in the U.S. or abroad) and how much risk is involved in the investment. Mutual fund managers will take a small portion of your money for commission, but the funds tends to be fairly liquid so you can move them around as needed.
Private Equity Real Estate Fund
These funds typically pool investment capital from institutional and private investors and then have a management team use the funds to enact different real estate investment strategies. These funds allow investors to reap the benefits of real estate without requiring much knowledge of the industry—trust is put in the experienced management team to use their knowledge of the industry and make the best investments. Typically, investors must pay a percentage of their assets as a management fee and a percentage of profits as a performance fee to the fund.
There are many companies that are involved in real estate, for which you can purchase stock in a direct investment. These companies include real estate companies, commercial real estate managers, shopping center companies, or companies that are more diversified but still related to real estate, including hotel chains, strip mall managers, or resort companies. Construction companies, such as large homebuilders, can also be good direct investments, but be sure to do your research to see if the areas being developed have strong economies. Directly investing in these companies and purchasing stock gives you control over where your money goes and can provide large dividends, but it can lead to a less diversified portfolio if all your money is in real estate-related companies.
Similar to investing in a private company, investing directly in a real estate project or opportunity has some restrictions and requires that investors meets accreditation standards. Investing in projects could involve funding a housing project or an individual developer’s home flip. You don’t have the expertise of real estate fund managers when you invest directly on your own, which could put you more at risk, but you also avoid many of the fees that come from working through a manager and instead have nearly complete control over where to put your money.
The digital world unlocks a new realm of real estate investing. Most online opportunities are limited to accredited investors, but it can be a great opportunity to go straight to the source with direct access to real estate investment opportunities. Using online platforms such as Fundrise, Realty Mogul, or RealtyShares allows investors to avoid paying a percentage of their profits to brokers and fund managers and have total control over where their money goes.
Many companies specialize in real estate investing strategies and allow investors to purchase public equity. Investing in public equity allows investors to diversify into a wide variety of real estate projects and also keeps things current, as many public entity firms adjust their strategies based on market levels and trends.
There are a number of ways to get involved in real estate investing that don’t require you to purchase or manage a property. In fact, many of these options don’t even require advanced knowledge of the real estate industry. Choosing the right strategy includes valuing your assets, risk, time, and knowledge, but by finding the right outlet for your real estate funds, you can sit back and enjoy the profits from a bustling industry.