Buying and selling homes is a proven winner when it comes to building wealth. It makes sense that property would be an attractive investment strategy, but it is difficult to break into that market. These days, there are some innovative ways to invest in real estate without buying property. As an investor, this solution is ideal because property has a track record of being comparatively low-risk and comparatively high-reward, and you can access these investments without the high cost of entry, and without the hassle of managing a property yourself.
In this article, we’ll show you how you can invest in real estate without buying property. We'll explore how you can invest with Gatsby Investment while also highlighting other alternatives. Some of the options below involve investing in online real estate programs while others take a more in-person approach. We'll walk you through the pros and cons of each, and help get you started on your investment journey.
Ways to Invest in Real Estate Without Buying Property
Many of these investment options have moved online over the past decade or two. But there are still a few traditional methods that largely take place offline through personal relationships. Let’s explore these three first.
Wholesaling
Wholesaling is when an investor offers to purchase a property, gets the offer accepted by the seller, then sells that purchase contract to a new buyer. The concept is similar to flipping homes; you’re basically flipping purchase contracts.
Wholesaling can be lucrative, particularly in a hot market where property values are increasing by the day. Investors who are well-connected in the industry do especially well with wholesaling because they tend to know the sellers and prospective buyers. Investors generally appreciate how quickly they can get in and get out of the deal.
But wholesaling can also be risky. If you can’t find a buyer, you are responsible for the purchase contract. You’ll either need to incur the penalties of backing out of the deal or purchase the property, which would defeat the purpose of planning to invest in real estate without buying property. The profit margins are also comparatively thin, which makes sense considering how quickly investors can usually facilitate the deals. But you might also find yourself spending far more time than one would expect scouting properties and lining up buyers.
Real Estate Private Equity Funding
A real estate private equity fund manager will accept investment funds from a group of individual investors and choose a project in which to invest the capital on behalf of the entire group.
To invest in private equity funding, you would need to have complete confidence in the fund manager. You would need to trust that person to choose the right project, negotiate favorable terms, and manage the property profitably and honestly.
Private equity funding deals can be difficult to find. As the name implies, the fund is private; it is not offered to the public. Many of these deals are arranged between investors who are connected via the same social networks.
If you don’t have an “in” or you don’t trust the fund manager to handle your investment properly, private equity funding is likely not the right fit for you.
Real Estate Notes
This option is so named because an investor carries the mortgage note for a property owner. Seller carry-back financing is a common real-world example of private investors holding real estate notes. If a buyer is having a difficult time qualifying for a home loan, the seller might offer to finance the purchase, effectively becoming the lender.
Of course, seller carry-backs aren’t the only way to invest in notes. As with most other financial instruments, these can be bought and sold online. But investors buying notes from websites will be paying retail prices for those notes on the open market. You’re likely to find a better deal working offline, communicating directly with lenders and banks.
Note investing is a historically “safe” investment, with the glaring exception of the housing market collapse of 2008. People generally do everything in their power to pay their mortgage. If the borrower is unable to pay, you have the option to foreclose on the home, in which case, possession of the property would revert to you. While that result is rare, this again defeats the purpose if your intention is to invest without actually owning the property.
Real Estate Hard Money Loans
Hard money loans are similar to real estate notes, in that you’re acting as the lender for someone else’s property purchase, and the loan is secured by the subject property. The difference is that hard money loans are primarily short-term loans, based primarily on the value of the collateral property rather than the credit of the buyer.
In the real world, hard money loans are often used to finance fix-and-flips. The investor lends a large sum to the flipper, expecting to recover the investment plus interest in around six months to two years.
The primary benefit to hard money loans is the comparatively high interest rates investors can charge. The primary downside risk. It’s often better if you can issue your hard money loan to someone you know to be an experienced and financially responsible property owner. And to personally vet borrowers for your hard money loan, it’s best to find these deals from your network rather than a random person online.
Tax Liens
Tax liens allow you to invest in the lien against a property rather than the property itself. Many states will hold a tax lien auction if a property owner fails to pay taxes. Rather than bidding up the amount you’re willing to pay for the lien, you bid down the interest rate you’re willing to accept for the lien. The investor who bids the lowest interest rate pays the back taxes and owns the lien against the property. The property owner will need to repay the investor the amount of the lien plus interest.
Investing in tax liens is typically still a “courthouse steps'' auction process in many counties. So investors have to be willing to attend the auction in person and bid against other investors.
How to Invest in Online Real Estate Without Buying Property
Options for non-traditional property investment have grown in the last few decades thanks to the Internet. Opportunities that were once available only to a select few are now accessible by everyday investors.
Here are five ways you can invest in online real estate without buying property.
REITs (Real Estate Investment Trusts)
REITs are companies that invest in income-generating property and distribute the profit from the holdings to shareholders in the form of dividends.
The SEC (Securities Exchange Commission) highly regulates REITs and has a strict definition of what constitutes a REIT. Among other criteria a REIT must:
1. Invest at least 75% of total assets in property, cash, or U.S. Treasuries,
2. Derive at least 75% of gross income from rents, interest on mortgages that finance real property, or sales, and
3. Pay a minimum of 90% of taxable income in the form of shareholder dividends each year.
The main benefit, besides the ease of purchase (which applies to all methods of online investing), is the dividend payout. Investments in a REIT will also benefit from some automatic diversification since REITs typically own large portfolios. Unfortunately, you won’t have any control over which properties are held by the REIT.
Real Estate Mutual Funds
Real estate mutual funds are similar to REITs in that they are both available on the stock exchange, they both focus on property, and they cover a portfolio of properties instead of a single project.
But mutual funds have a little more freedom than the heavily structured REITs. Mutual funds aren’t companies; they are simply packages of investments actively managed by a fund manager. Mutual funds can invest in any stock in the sector. This could include real estate companies, like eXp and CBRE, or even REITs. And mutual funds aren’t required to pay out a dividend.
Mutual funds aren’t exciting, but they are a solid vehicle for passive, long-term investments in a diverse portfolio of property-based investments.
Real Estate EFTs
ETFs are similar to mutual funds in that they are purchased on the stock exchange and include a diverse package of stock in real estate companies, REITs, and even home building companies.
But there are a few key differences:
1. While mutual funds only trade at the end of the day, ETFs trade all day long.
2. Unlike mutual funds, which are hand-picked by a fund manager, ETFs generally simply follow an index, so the expenses are lower for an index fund than a mutual fund.
3. Mutual funds typically have an investment minimum because they are actively managed, but ETFs often don’t have an investment minimum.
ETFs are a good option for investors who want a low-cost, fairly liquid real estate investment.
Real Estate Crowdfunding
The JOBS Act of 2012 opened the door for real estate crowdfunding by allowing private companies to raise money from the public. Crowdfunding is a general term used to describe any effort of sourcing capital from investors to fund a project. But when we think of crowdfunding, we think of online platforms that allow investors at all levels to buy into a specific project, along with a pool of other investors.
The exciting thing about crowdfunding is that you get to choose which specific piece of property you want to invest in. Investment minimums are low, and you get the benefit of having an expert manage the project on behalf of the fund.
While some crowdfunded projects use equity funding, which gives investors a stake in the underlying property, many projects use debt funding instead. This means investors have a lender role rather than an ownership role.
Crowdfunding is a flexible way to invest in online real estate without actually purchasing a home.
Real Estate Syndication
Real estate syndication takes crowdfunding a step further. Like general crowdfunding, syndication pools money from multiple investors to give you access to a project that would be inaccessible to you as an individual investor. And, like crowdfunding, you get to choose the exact project(s) you want to invest in.
But, unlike most crowdfunding, syndication gives you an ownership stake in the project. A legal partnership is established between the project’s sponsor and the investors. Investors will then own a share in the legal entity that owns the property.
With syndication, you get the benefits of:
- Flexibility: You can invest in deals that take fewer than six months or larger developments that take over a year. Projects could include single-family home flips, multi-family developments or rental properties, and even luxury real estate.
- Control over which specific project(s) you invest in: It’s a lot more exciting to watch a tangible asset progress than to watch the numbers on an REIT portfolio.
- Comparatively low minimum investments: With Gatsby Investment you can invest in a $2.5 million property for as little as $25,000.
- Diversification potential. You have the option to invest in multiple projects to diversify your investment.
- Ownership interest.
- Expert management. Your sponsor will scout locations to find projects with high profitability potential, supervise the work on the project, and manage the fund.
- Competitive returns. You're leveraging other investors for access to larger projects with higher returns than you could access as an individual investor.
The primary downside to syndication is that it’s only available to accredited investors. Gatsby Investment chose this investment model because it offers a mix of some of the best features of the other investment options on this list.
Sign up with Gatsby Investment to begin investing in real estate today! Once your accredited investor status is confirmed, you’ll be able to choose your project(s) and start investing.