How to invest in real estate without buying a home
Real estate remains a strong investment, even with prices slowing.
But owning property can be a hassle. A huge amount of capital gets tied up in a handful of properties. And you have to deal with the logistics of holding and managing that home, office or condo.
Investing in real estate is a great way to diversify a portfolio says Jeff Rose, a certified financial planner based in Nashville.
“But you’ll only want to have 5 percent of your portfolio in real estate,” he says. “Up to 10 percent, that would be on the higher side.”
Investing in real estate equity through ETFs, mutual funds or real estate investment funds provides exposure to the upside of real estate appreciation.
But that kind of volatility isn’t a good fit for everyone. Another option is investing in real estate risk, which comes with more fixed returns.
Real estate equity
Real estate investment trusts, or REITs, are a common way to diversify into real estate equity. REITs are publicly-traded companies that own income-producing properties — office buildings, hotels, apartment complexes, shopping malls — that give people the chance to invest in the real estate portfolios.
REITs are a way to hold a variety of real estate properties as easily as buying a stock, and provide dividend-based income. But they come with a higher level of risk than say, an index fund.
“Any time you’re looking at a publicly traded REIT, which is basically a stock, there is more risk,” says Rose. “They focus on one area. It may be one type of real estate or it could be one geographic area, and if that sector or area takes a hit, you feel it.”
Rose suggests taking advantage of the upside of REITs by investing in them through ETFs or mutual funds to further diversify your exposure.
“The simplest way to invest in real estate is through a mutual fund or an ETF,” says Rose.
A real estate ETF, like Vanguard’s VNQ, offers investors publicly traded equity REITS and other real estate investments. Similarly, iShares’ IYR offers domestic real estate stocks and REITs.
Mutual funds are another way to diversify a long term investment strategy with real estate. The T. Rowe Price Real Estate Fund (TRREX), with $5.3 billion in assets, is a giant among actively managed real estate mutual funds.
Newer online platforms, like Fundrise, Rich Uncles or Realty Mogul allow investors to get into diversified real estate portfolios for a lot less than the large funds.
Rich Uncles allows you to invest in its own REITs for as little as $500, or its new student housing REIT, for example, with a $5 minimum investment. At Fundrise, another platform with its own REITs, the minimum investment is $500.
Realty Mogul offers access to private investment deals or you can invest in its REITs, which have a minimum investment of $1,000.
While these can provide solid investment returns and dividends, they’re illiquid and investors should not expect to sell quickly. But online platforms can provide greater visibility into what you’re purchasing.
“I enjoy investing in the online platforms because I can see the properties that I am investing in,” says Rose. “Typically if you’re buying an ETF or mutual fund or REIT it can be harder to see what you’re buying.”
And no matter how you’re investing, he says, “you have to know what kind of real estate you’re investing in.”
Real estate debt
Another way to earn steady passive income through real estate is to invest in someone’s mortgage. Using a platform called PeerStreet, investors can back high-interest loans that offer regular fixed-income payouts.
“A lot of people want exposure to real estate without that equity-style risk,” says Brett Crosby, co-founder and chief operating officer of PeerStreet. “We made it accessible and some people are much more comfortable with this level of risk.”
Here’s how it works: PeerStreet buys first-lien mortgages from a network of private lenders. Investors can search the site for investments and select investments based on criteria like term, yield and the loan-to-value ratio of the home. The options are updated daily.
Alternatively you can choose automated investing by pre-selecting details that place you in investments matching your criteria. Investments carry returns ranging from 6 percent to 9 percent and the typical deal on the site is between 6 to 36 months.
Other platforms for investing in real estate debt, like AlphaFlow, offer a portfolio of real estate loans rather than investments in individual loans.
While investments backed by mortgages are nothing new, it was previously very difficult for individuals to invest. “If it does go bad, you need a team in place, if you have to foreclose,” says Crosby. “We handle all that. We have taken an active investment and made it passive.”
While the company is working to expand its offerings to all investors, Securities and Exchange Commission regulations currently limit investments with PeerStreet to accredited investors. For an individual to qualify as an accredited investor you need to earn an annual income over $200,000 ($300,000 annually with a spouse) for the past two years, with a reasonable expectation of the same level of income going forward. Also, an individual with a net worth exceeding $1 million, excluding the value of a primary residence, qualifies.