invest real estate without buying property

Most people when talking about investing in real estate refer to buying properties to let and/or to benefit from capital appreciation.

But buying real estate usually requires an important up-front investment or already owning other properties.

So what happens when you only have $2000 to invest? Can you not invest in real estate investment at all?

Not really, real estate investing is not exclusive to big players as I am going to demonstrate in this blog post.

And btw, money is not the only reason why you should look for alternative to buying a property to invest in real estate, there are many other reasons why buying a property is not the best of ideas:

  • Buying properties for investment is very hands-on and requires a lot of work, so unless you really like property shopping, dealing with solicitors, managing tenancies, it might not be a good deal after all for you.
  • You will have to pay a property tax, and depending on where you live, your tax bill might greatly suffer from that.
  • Buying a property requires an important upfront investment.
  • If you enter the market at the peak or not too far away from it, you might end up in negative equity if the valuations come down.
  • You incur a personal liability if anything goes wrong as it is a personal purchase (not via a limited liability company)

So how do you invest in Real Estate Investments without buying a property yourself?

1.REITs

A REIT, which stands for Real Estate Investment trust, is an investment company which legal form is a trust that allows investors to collectively invest in a portfolio of properties that they would not have access to otherwise.

A REIT is in the business of either owning and operating or financing real estate or investing and owning mortgages.

Investing in a REIT is probably the best compromise you could find in the market for investing in real estate without having to buy a property.

As a REIT investor, you own shares (or units) of the company, which on its turn owns properties (or mortgages for mortgage REITS).  

Like any other company, you make money from a REIT two ways: Capital appreciation when you shares appreciate in value (usually when the underlying properties appreciate in value too on an aggregate level) and receiving rental and lease income in the form of dividends.

The dividend distribution part is where the REIT magic operates, although a REIT is a company, its leases and rental income is not taxed as profit at the company level but only taxed as dividends at investors’ level.

This exemption from taxes is of course subject to certain conditions, distributing at least 90% of the income to shareholders being the most important one.

US REITs were introduced by congress in 1960, and were designed to combine real estate and stock-based investments features specifically for the purpose of making income-producing real estate accessible to small investors.

You may find this list of real estate REITs useful.

2.Real Estate Index funds

Another way to invest in real estate without buying any property is to buy shares of Real Estate index funds. These are funds which invest in real estate primarily via REITS and other firms that manages properties and collect rent.

This type of investment comes in two forms, index funds and ETFs.

Both investments fulfil the same purpose of giving you exposure to real estate in an easy, liquid and cost effective manner while mitigating risks by offering instant diversification (You buy a share of a fund which is invested in a pool of properties, the good investments should cover the bad ones, if the selection process is good and the job is done well).

I have a small preference for ETFs though because they don’t require any minimum investment – you can buy a share with as little as $100, while most index funds would have a minimum investment of at least $1000 -.

If you want to understand the difference between ETFs and index funds ( a type of mutual funds), check out my post ETFs vs Mutual funds, which is best for you portfolio.

3.Real Estate Crowdfunding

Before learning about crowdfunding, you first need to understand the difference between accredited investors and non accredited investors.

Each country has its own investment rules and definitions, but the US defines an accredited investor as someone with a net worth of over $1M excluding the value of your primary residence or who has earned at least $200,000 for at least two years. Non-accredited investors are the rest of the population as you may guess.

Why is this so important?

Because before 16 May 2016, crowdfunding was not open to US non-accredited investors and for that matter, any investing in early stage companies.  Only accredited investors considered to be more investment savvy, could access these so called risky investments.

But since the 16 may 2016, Title III rules were adopted by the SEC which opened doors of equity crowdfunding to ordinary people, not just the super rich.

Now, any private company could raise capital via crowdfunding platforms from ordinary people, subject to compliance with Title III rules.

As a result, crowdfunding has become another popular way for investors to access real estate investment and the market has seen a proliferation of online crowdfunding platforms such as Fundrise, EquityMultiple, RealtyShares, Realty Mogul, GroundFloor, Peer Street and ArborCrowd.

Democratizing real estate investment is not the only pros of real estate crowdfunding. Crowdfunding makes it very easy to not put all your eggs in one basket as you can easily spread a small amount of capital across different investments to hedge against losses.

Disclaimer: I am not an Investment advisor not a professional tax advisor. This blog post is for informational purposes only and is not intended to be an investment nor a tax advice. You should always consult with a investment advisor or a professional tax advisor for details about your investments and their tax implications. Investments are risky and past performance is no guarantee of future performance.

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