Real estate investing involves the purchase, ownership, management, rental and/or sale of real estate for profit. Improvement of realty property as part of a real estate investment strategy is generally considered to be a sub-specialty of real estate investing called real estate development.
Over the past decade, the real estate “boom” has taken a drastic shift. The original trend of buying and selling for profit gradually changed to six month fixer uppers, short sales, rentals to eventually, the most popular, hospitality service brokerage like Airbnb.
Now a new wave of real estate investing is emerging and it has nothing to do with actually acquiring property. So how does a person actually get in to real estate without having real estate?
#1: Invest in real estate ETFs
An exchange-traded fund, also known as an ETF, is a collection of stocks or bonds in a single fund. ETFs are similar to index funds and mutual funds in the fact they come with the same broad diversification and low costs over all.
If you’re angling to invest in real estate but also want to diversify, investing in a real-estate themed ETF can be a smart move. Vanguard’s VNQ, for example, is a real estate ETF that invests in stocks issued by real estate investment trusts (REITs) that purchase office buildings, hotels, and other types of property. IYR is another real estate ETF that works similarly since it offers targeted access to domestic real estate stocks and REITs.
#2: Invest in real estate mutual funds
Just like you can invest in real estate ETFs, you can also invest in real estate mutual funds. A colleague of mine, Taylor Schulte of Define Financial in San Diego, says he swears by a real estate mutual fund known as DFREX. Why? Because its low costs and track record help him feel confident about future returns. In addition to low costs, Schulte says the strategy of DFREX is backed by decades of academic research from Nobel Prize winning economists.
TIREX is another real estate mutual fund to consider with $1.9 billion in assets, broad diversification among real estate holdings, and low fees.
#3: Invest in REITs
Consumers invest in REITs for the same reason they invest in real estate ETFs and mutual funds; they want to invest in real estate without holding physical property. REITs let you do exactly that while also diversifying your holdings based on the type of real estate class each REIT invests in. Invest in publicly-traded REITs.
#4: Invest in a real estate focused company
There are many companies that own and manage real estate without operating as a REIT. The difference is, you’ll have to dig to find them and they may pay a lower dividend than a REIT.
Companies that are real estate-focused can include hotels, resort operators, timeshare companies, and commercial real estate developers, for example. Make sure to conduct due diligence before you buy stock in individual companies, but this option can be a good one if you want exposure to a specific type of real estate investment and have time to research historical data, company history, and other details.
#5: Invest in home construction
If you look at real estate market growth over the last decade or longer, it’s easy to see that much of it is the result of limited housing inventory. For this reason, many predict that construction of new homes will continue to boom over the next few decades or more.
In that sense, it’s easy to see why investing in the construction side of the industry could also be smart. An entire industry of homebuilders will need to develop new neighborhoods and rehabilitate old ones, after all, so now may be a good time to buy in.
Large homebuilders to watch include LGI Homes (LGIH), Lennar (LEN), D.R. Horton (DHI), and Pulte Homes (PHM), but there are plenty of others to discover on your own.
#6: Invest in real estate notes
Real estate notes are a type of investment you can buy if you’re interested in investing in real estate but don’t necessarily want to deal with a brick-and-mortar building. When you’re investing in real estate notes through a bank, you’re typically buying debt at prices that are well below what a retail investor would pay.
I’ve invested in real estate notes in the past via an individual investor I know who purchases and renovates property. So far, my experiences have only been positive. However, I would conduct due diligence to ensure you know what you’re getting into whether you invest into real estate notes with a bank or a real estate investor who is actively pursuing new properties.
#7: Hard money loans
If you don’t like any of the other ideas on this list but have cash to lend, you can also consider giving a hard money loan. My friend Jim Wang ofWalletHacks.com says he is currently investing in real estate with this strategy since he wants exposure but doesn’t want to deal with being a landlord. He also says the ROI (return on investment) for his time wouldn’t be as great as other opportunities since his time is valuable.
Hard money loans are basically a direct loan to a real estate investor, he says. Wang offers real estate loans to an investor he knows in person, and he receives a 12% return on his money as a result. Wang says he feels comfortable with the set-up since the investor is someone he knows, but he isn’t sure he would be comfortable with a stranger.
Either way, hard money loans directly to real estate investors are another strategy to consider if you want to invest in real estate but don’t want to deal with a property and the headaches that come with it.
#8: Invest in real estate online
Last but not least, don’t forget about all the new companies that have cropped up to help investors get involved in real estate without getting their hands dirty. Websites like Fundrise and Realty Mogul let you invest into commercial or residential real estate investments and receive cash flow distributions in return.
Investing with either company is similar to investing in REITs in that your money is pooled with cash from other investors who take advantage of the platform. The cash you invest may be used to purchase residential property, commercial real estate, apartment buildings, and more. Ultimately, you get the benefit of dividends and distributions and long-term appreciation of the properties you “own.”
While neither company has been around for too long, they are both performing well so far. Fundrise returned an average of 11.4% on invested dollars in 2017 net of fees and 9.11% in 2018 after all, and you don’t have to be an accredited investor to open an account.