How to Invest in Real Estate Without Buying Property

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September 27, 2022

Adam K. |

4 Minute Read

Do you want the benefits of real estate investing but not the time and stress associated with managing a physical rental property?

You’re in luck…

There are numerous ways to invest in real estate without buying a property.

From publicly-traded REITs to real estate crowdfunding platforms, there are options for all types of real estate investors.

Word Invest and model of home from wood. Real Estate Investment concept.

1. Invest in Real Estate Crowdfunding

Through real estate crowdfunding, you generally earn higher returns than publicly-traded REITs while avoiding stock market volatility.

A Real estate crowdfunding platform helps a sponsor (the company or team managing the investment property) raise capital from individual investors like you and me. Since the passage of the JOBs Act in 2012, real estate crowdfunding is an excellent way to get exposure to the real estate market while avoiding the hassle of managing a rental property.

The types of real estate projects available for investing vary from individual properties to large multi-family apartment complexes and commercial buildings.

Benefits of Real Estate Crowdfunding

  • Private real estate is less volatile than the stock market
  • Real estate crowdfunding tends to have higher returns than publicly traded REITs
  • Pick investments based on your risk tolerance
  • Low minimum investment
  • Returns are less correlated to the stock market

Groundfloor is my go-to real estate crowdfunding platform.

For just $10, you can invest in individual ‘fix and flip’ properties. The loans are usually less than 12 months, with an average interest rate of around 10%. Plus, the loans are collateralized, providing greater security for investors.

2. Invest in Real Estate Investment Trusts (REITs)

REITs offer the best of private real estate and the stock market because they are publicly traded companies that invest in real estate.

REITs are an excellent alternative to buying a property because they offer the liquidity and transparency of publicly traded securities while avoiding landlord responsibilities associated with physical real estate investments.

growth, progress, graph

REITs are companies that operate or invest in real estate. Most REITs are equity REITs, meaning they own or operate the property. However, there are also mortgage REITs that provide financing or invest in mortgage-backed securities.

REITs invest in most real estate property types, including offices, apartment buildings, warehouses, retail centers, medical facilities, data centers, cell towers, infrastructure and hotels.

A REIT stands for Real Estate Investment Trust. The term is just a tax concept, and as long as a company satisfies a long list of requirements set forth by the IRS, it can qualify as a REIT.

Publicly traded REITs are an ideal alternative to buying a property because they generate consistent passive income as they are required to pass 90% of their income to shareholders, and tenants often sign long-term leases, providing financial stability for the REIT.

Benefits of REIT Investing

  • Liquidity (Easily buy and sell securities)
  • Managed by seasoned real estate professionals
  • Transparency: Publicly traded companies are subject to additional scrutiny
  • Passive Income
  • REITs own and operate their investments
  • Low fees

3. Invest in Real Estate ETFs

Real estate ETFs are an excellent alternative to physical real estate because they provide inherent diversification by investing across multiple REITs.

Plus, real estate ETFs have lower expense ratios than investing across individual REITs and lower volatility.

A Real estate ETF is a publicly traded investment fund that tracks the performance of a basket of REITs.

The ETFs usually track the performance of a particular index, for example, the MSCI US Investable Market Real Estate 25/50 Index.

Benefits of REIT ETF Investing

All the benefits of individual REITs plus:

  • Inherit diversification
  • Lower expense ratios

If you are a real estate investor, one of the most popular REIT ETFs is Vanguard’s VNQ which has an expense ratio of just 0.12%, making it a cheap way to invest in the real estate market.

4. Invest in Non-Traded REITs

Another excellent way to gain real estate exposure is through investing in non-traded REITs.

Non-traded REITs are similar to publicly traded REITs but do not offer the ability to buy and sell your investments quickly.

Non-traded REITs generally have higher returns than publicly-traded REITs, making them appealing real estate investments to yield-hungry investors. The higher yield is often associated with their lack of liquidity and the theory that private markets are deemed less ‘efficient.’

Plus, non-traded REITs are less correlated and volatile than their publicly traded counterparts, increasing their appeal.

Benefits of Non-Traded REITs

  • Historically higher returns than publicly-traded REITs
  • Lower stock market correlation than publicly-traded REITs
  • Most platforms offer multiple investor tools and services

If non-traded REITs sound appealing, the online real estate platform Fundrise is the preeminent company in non-traded REIT investing. Fundrise has over 330,000 investors and has been in the business since 2010.

5. Invest in Real Estate Pre-Funding Notes

Through real estate prefunding, investors provide financing for a real estate project before a crowdfunding loan is fully invested.

Real estate pre-funding is a less-known real estate investment. Real estate prefunding is a hybrid of crowdfunding and bond investing.

Pre-funding is quite common in the real estate industry and is offered by many companies to generate passive income for their investors.

After a company completes due diligence, it can be critical for a project to receive funding as soon as possible instead of the deal sitting dormant.

When investing in prefunding notes, you are not directly investing in real estate projects per se but rather investing in a line of credit used to fund investors’ loans. Real estate prefunding is a great way to earn a higher return than you would in a CD or FDIC-insured savings account while avoiding market risk.

Benefits of Prefunding Investing

  • Short Duration
  • Higher returns than an FDIC savings account or CD
  • Less risk than stock market investing
  • Passive Income – No need to select properties to invest

Two popular ways to invest in real estate pre-funding are through Stairs by Groundfloor, and, if you are an accredited investor, Fund That Flip.

6. Invest in Individual Private Real Estate Deals

RealtyMogul allows you to invest in individual offices, multifamily, retail, or industrial real estate deals. However, you must be an accredited investor to invest in their individual property deals.

Investment minimums for individual properties range from $25,000 – $50,000, depending on the investment. Through individual property investing, you are taking an equity investment in the project. And within the capital stack, equity investments have the highest risk and the potential for the highest returns.

RealtyMogul individual property investments target an investment horizon of 3 – 7 years, with no options for early redemptions.

Benefits of Individual Private Real Estate Deals

  • Take a directional view of real estate
  • Potential for higher returns (but also high risk)
  • Invest in properties usually only available to corporations

7. Invest in Single Family Rentals

Through Roofstock, you are buying a single-family rental, but their platform makes the process much more manageable than scouring properties on your own. Through the Roofstock marketplace, buyers and sellers come together to buy and sell their properties.

Most properties are already rented when you buy an individual property through Roofstock, so you can start earning cash flow on the day you close. In addition, Roofstock provides property management services, alleviating one of the most significant headaches associated with real estate ownership.

Their easy-to-use platform allows you the filter through multiple properties based on your requirements.

The main downside is that you are still buying a property, and the associated costs are much higher than investing in REITs or a crowdfunding company like Groundfloor.

Benefits of Single Family Rentals Through Roofstock

  • Most properties have tenants so that you can earn income right away
  • Property management services reduce the ownership burden
  • The Roofstock platform allows you to browse and filter properties based on your requirements.

8. Buy Real Estate Mutual Funds

A Real estate mutual fund is an actively managed, publicly-traded investment fund. Real estate mutual funds invest in publicly-traded REITs and publicly traded real estate stocks.

Real estate mutual funds are a great option because they are actively managed by professional money managers, making them ideal for real estate investors who want a more hands-on experience.

Note: A real estate mutual fund trades and prices only once daily, making it a bit different from ETFs, which can be traded like an individual stock.

Real Estate Mutual Funds

  • Actively managed investment portfolio
Real World Investor.com

Adam

Adam is the founder of realworldinvestor.com, an investing website dedicated to helping discerning individuals make the best investment decisions.

Before starting Real World Investor, he was a Vice President at the 3rd largest investment bank in the US. He also spent time at prestigious firms like J.P. Morgan and Deloitte Consulting. He has over 10 years of experience working in financial services. His experience includes working with complex derivatives while spending many years working on a trading floor.

He has a bachelor's degree in Business Administration, majoring in finance. Adam is married and resides in New Jersey with his wife.