How to invest in real estate without buying property: Smart corporate investments

What do successful investors like Ben Miller, co-founder and CEO of Fundrise, or Jilliene Helman, co-founder and CEO of RealtyMogul, have in common? They both knew that real estate is key to a strong investment portfolio. But they also recognized that traditional real estate investing comes with significant challenges, including high costs and complicated processes.

The good news is that investing in real estate doesn’t have to mean buying physical properties. There are alternative strategies that let you invest in real estate without the hassle of ownership. These methods can offer strong returns, liquidity, and lower risk, making them an attractive option when you want to diversify your investments without property management.

In this guide, you’ll learn how to invest in real estate without buying property using methods like REITs, real estate mutual funds and EFTs, crowdfunding, and RELPs.

Real estate investment trusts (REITs)

REITs are one of the most popular ways to invest in real estate without owning physical property. But what is a real estate investment trust (REIT)?

A REIT is a property investment company that owns and typically operates income-producing real estate across various sectors. REITs offer investors the opportunity to earn dividends from real estate investments.

Types of REITs

The classification of REITs depends on whether you are categorizing them based on their investment focus or their trading status. When classified by investment focus, there are three main types of REITs:

1. Equity REITs: These REITs invest directly in and own properties, generating revenue through leasing space and collecting rent.
2. Mortgage REITs (mREITs): These REITs invest in mortgages or mortgage-backed securities, earning income from the interest.
3. Hybrid REITs: Hybrid REITs combine the features of both equity and mortgage REITs, letting you earn from rental income and interest earned.

When classified by trading status, REITs fall into three main categories:

1. Publicly traded REITs: These REITs are listed on major stock exchanges and can be bought and sold by the public, offering high liquidity and transparency.
2. Public non-traded REITs: These are registered with the Securities and Exchange Commission (SEC) but not listed on public exchanges, making them less liquid but potentially offering higher returns.
3. Private REITs: These REITs are not publicly traded or registered with the SEC, and are typically only available to accredited investors.

Advantages of REITs

REITs provide numerous advantages, making them an attractive investment option.

1. Liquidity: REITs offer high liquidity since they are traded on major stock exchanges like other public companies. This allows investors to buy and sell shares easily, unlike physical real estate.
2. Steady income: REITs distribute at least 90% of their taxable income to shareholders as dividends, providing a steady income stream
3. Diversification: Investing in REITs allows for diversification across different real estate sectors and geographic locations, reducing risk.
4. Professional management: REITs are managed by experienced real estate professionals. This removes the need for hands-on management or extensive market knowledge.

Real estate mutual funds and ETFs

Real estate mutual funds and exchange-traded funds (ETFs) are other viable options for investing in real estate without buying property.

Real estate mutual funds pool money from multiple investors to invest in a diversified portfolio of real estate-related assets. These can include REITs, real estate stocks, and bonds tied to the real estate sector. By investing in a mutual fund, you benefit from the expertise of fund managers who make investment decisions on your behalf.

Real estate ETFs are funds that track a specific index of real estate-related assets and are traded on stock exchanges like individual stocks. They offer diversification across various real estate investments, such as REITs and real estate companies.

Investment strategy

Investing in real estate mutual funds and ETFs involves selecting funds that align with your investment goals and risk tolerance. Here are a few aspects to consider:

Management style and costs

Real estate mutual funds are actively managed. Professional fund managers make decisions on buying and selling assets within the fund, leading to potentially higher returns. This means that mutual funds often come with higher expense ratios due to active management and other operational costs.

ETFs are typically passively managed as they track a specific index. This usually results in lower expense ratios, which can be beneficial if you want to minimize fees over the long term.

Liquidity

ETFs are traded on stock exchanges and can be bought or sold at any time during market hours, offering high liquidity. Mutual funds are only traded at the end of the trading day, so you may have less flexibility if you need to access your money quickly.

Benefit of mutual funds and ETFs

The main benefit of investing in real estate mutual funds and ETFs is diversification. These funds spread investments across multiple assets, reducing the impact of any single asset’s poor performance on your portfolio.

Crowdfunding platforms

In real estate, crowdfunding allows you to invest in property projects alongside other investors, often with a relatively low initial investment. This approach democratizes real estate investing, making it accessible to more people.

It’s key to know the difference between real estate crowdfunding vs REIT. With crowdfunding, you invest directly in specific real estate projects, giving you more control and potentially higher returns. REITs pool money to invest in a diversified portfolio of properties, offering more stability and liquidity.

Crowdfunding and mutual funds are also often confused. In crowdfunding, you select individual real estate projects to invest in, while mutual funds spread your investment across a broad range of real estate-related assets.

Crowdfunding in real estate: How it works

Popular real estate crowdfunding platforms like Fundrise, RealtyMogul, and EquityMultiple let you invest alongside others by pooling funds for real estate projects. You can explore various opportunities, such as residential developments or commercial properties, and choose the ones that align with your investment goals.

Crowdfunding platforms give you a secure and easy way to invest and earn returns from rental income or property sales. The platform usually charges a fee if the fundraising is successful, with the fee amount depending on the platform’s pricing structure.

Pros and cons of real estate crowdfunding

Real estate crowdfunding lets you invest with lower entry costs, gives you access to different types of properties, and spreads your investment across multiple projects. It’s also a way to earn passive income without managing properties yourself.

There are some drawbacks to consider. Crowdfunding investments are often less liquid than publicly traded REITs or ETFs since they are tied to the project’s duration. The risk can vary based on the specific project and the platform’s reliability, so it’s essential to do thorough research before investing.

Real estate limited partnerships (RELPs)

Real estate limited partnerships (RELPs) are another option for investing in real estate without direct ownership. RELPs consist of a general partner who manages the investment and limited partners who provide the capital but have no management responsibilities. This structure helps you benefit from real estate investments while minimizing your involvement.

Advantages and considerations of real estate limited partnerships

RELPs can be a viable investment choice offering these benefits:

• Passive income: With RELPs, you can earn passive income through regular distributions often without any involvement in the day-to-day management of the properties.
• Tax benefits: RELPs often provide tax advantages, such as depreciation deductions which can reduce your tax liability.
• Expertise: By investing in an RELP, you gain the expertise of experienced general partners who manage the properties and make strategic decisions.

There are risks to consider. RELPs are typically less liquid than other real estate investments, meaning it can be difficult to sell your stake quickly if needed. The success of the partnership heavily depends on the general partner’s abilities, adding to the risk of losing your investment if the properties do not perform well.

Can you make money in real estate without buying property?

You can profit from real estate without directly owning any property. Investments in REITs, mutual funds, ETFs, crowdfunding platforms, or RELPs can generate returns that match or exceed those from direct property ownership. These alternatives offer diversification, expert management, and liquidity, making them key components for building a successful real estate investment portfolio.

Make the right investment decisions with MRI Software

At MRI Software, our real estate investment management software empowers you to make smarter, data-driven investment decisions. Our tools provide comprehensive analytics, portfolio management, and reporting features so you can optimize your investments and maximize returns. You have everything you need to pursue real estate investing with confidence.

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