Invest In Real Estate Without Buying A Property, Know-How?
Investing in real estate may seem like a lucrative and alluring idea, but getting started in real estate investments is the toughest thing, owing to the reason that it requires a huge amount of capital. While it is easy to presume that the only way to invest in real estate is through direct property ownership, the fact is that there are several other real estate investment opportunities that do not actually involve property ownership yet offer enormous and stable cash flow.
With these investment options, investors can reap the benefits like rent from the estate’s tenants, capital appreciation, and get their portfolios diversified into an alternative, but tested asset class. And all of this, without having any ongoing responsibilities of building maintenance, being landlord, and many other obligations that property owners usually have.
This article will help you get knowledge over the parallel realm of real estate that deals with investing in real estate without buying a property.
Real estate exchange-traded funds (ETFs)
Real estate ETFs are listed and traded on national exchanges, just like stocks. They are quite similar to index funds and mutual funds in the fact they both offer the same - broad diversification and low costs to the investor.
In India, ETFs include securities traded within India and they consist of real estate-associated industries such as residential constructions, commercial properties, or hotel chains. By buying an ETF, investors can put in their money in properties across the subcontinent, which gives them wider exposure. Despite the higher risks that ETFs pose, they are worth investing in because of the higher returns they offer. And just like stocks, investors can sell ETFs when the returns aren’t promising or substantial.
Real Estate Mutual Funds (MFs)
The concept of real estate MFs is similar to a mutual fund wherein, the investors own a portion of the mutual fund while the company/management itself owns the investment that it makes. The earnings that investors receive are in the form of a dividend or a certain amount of share appreciation.
Real estate MFs primarily invest in REITs, real estate stocks, and residential, commercial, and industrial units. An important point to consider is that the earnings from these funds depend on various factors like the demand and supply, demographics, market conditions, and interest rates.
Mutual funds allow investors to have a diversified portfolio-both in terms of having a mutual fund and having real estate. Like with other sorts of mutual funds, investors can exercise options to choose the ones that are growth-oriented or income-oriented. They are designed with the intention to mitigate risks, yet they are still vulnerable to the risks that are naturally associated with real estate. Nevertheless, they are worth all of the risk.
Real estate investment trust (REIT)
A real estate investment trust (REIT) is a company that makes equity investments in the sector of commercial real estate. They were introduced for the purpose of giving individual investors access to invest their money in real estate as an asset, without the need for direct ownership over the property.
Like a mutual fund, REIT investors own shares of the REIT, and the REIT owns the asset that it invests on. For this, investors earn returns in the form of a dividend depending upon the performance of the REIT’s investments.
By the law of SEBI, a REIT is required to invest a minimum of 75% of its assets in real estate and reap at least 75% of its gross income from those investments. It must also distribute at least 90% of its taxable income among the shareholders. This can be a driving motto for many investors looking for alternatives instead of buying a property.
Another investment platform is fractional ownership. It enables investors to buy a portion of a property so that they can get all the perks of owning a property without the upfront cost and any ongoing hassles. This concept is more suitable for prime assets in commercial real estate where the risks are really high and an individual investor may not be able to afford the entire property.
Investors can put in fractions of elite commercial properties and earn a steady rental yield and build long-term wealth. It is emerging as an investment avenue for the enthusiastic middle class and retail investors, an asset collection known chiefly for institutional investments. This model has been widespread in Europe and the US and is now picking up momentum in India as well.
Online investing platforms
Online real estate investment platforms collect money from many investors and invest on their behalf in opportunities that would otherwise be difficult or hugely expensive to find or have access to.
These investment platforms range widely in investment offerings, types of property, investment minimum amounts, and investor access offered. These online investment platforms either focus on a single property or a combination of residential and commercial properties. And more often, the investments that the investors make are part of crowdfunding, a way for others to be able to buy property without requiring venture capital.
However, this medium of investment is best for those investors who can afford to leave their investments uninterrupted for an extended period of time.
Flipping houses involves purchasing a property, repairing and renovating it (if required), and reselling it for gain. Flipping houses is in most ways similar to wholesaling but the key difference is that in wholesaling, the investors don't have to repair it. They can sell it right away for a profit considering the market conditions, demands, etc.
To get high profits, investors typically purchase properties that present a lower price than what the markets offer or buy from those owners who are in dire need of cash. After taking ownership of the property, the investors quickly start to search for prospective buyers by advertising their property.This way, they earn revenue in the form of a fee that is associated with the transaction, typically a certain percentage of the total property cost.
This field requires explicit knowledge of real estate asset types, their values, and the market. A skilled investor flips various properties without wasting any time and is always on the search for suitable properties to purchase.
Invest in a real estate focused corporation
There are numerous corporations that own and manage real estate without actually operating as a REIT. The difference is that they might pay a lower dividend than a REIT.
Companies of this sort include hotels, resorts, timeshare associations, CRE developers, etc. Make sure to conduct due diligence before purchasing stock in individual companies. This option can be a great one if the investor wants exposure to a particular type of real estate investment and has ample time to research all the details pertaining to the company and the investment.
Alternative Investment Funds (AIFs)
AIFs, basically invest in startups, nascent-stage venture funds, infrastructure funds, real estate, and more. According to the SEBI, AIFs are privately merged funds that can either be open-ended or close-ended, depending on the class.
While AIFs are more profitable than mutual funds, they require a substantial minimum investment of INR 1 crore and as a result, are ideal for High Networth Investors(HNIs).
Hard money loans
Hard money loan, otherwise known as a bridge loan, is basically a loan extended by an individual to a real estate investor. It involves short-term financing to an investment project. This loan is given on the basis of the value of the property secured. Typically, the lender provides credit up to 65-75% of the property value and generates income by way of interest, which is usually greater as compared to the conventional property loans.
Real estate partnerships
It is one of the most common ways to invest in real estate, with each person taking over different responsibilities. Often, this can be opted as a way to buy property at a lower price. Individuals can set up terms such as - paying the debt or perhaps handling the down payment for the asset. Depending on the terms of the partnership, a person may be investing in real estate without actually putting too much hands-on work of owning property.
If we look at the real estate market growth over the last few decades, it’s easy to say that much of it is the outcome of limited housing inventory. And for this reason, many predict that construction of new homes will continue to be on the rise over the next few decades or more. In that sense, it’s easy to comprehend why investing in the construction side of the real estate industry could be a smart strategy.
In case you aspire to be a part of the real estate sector but still want to stay away from the struggles of being a landlord, you can choose to try investing through any of the above-mentioned mediums. However, for complete amateurs, it is always advisable to get themselves well equipped with the necessary knowledge and do enough homework before venturing into this field of real estate investing without actually buying a property.
Yes. There are several ways to invest in real estate without actually buying property. They are REITs, crowdfunding, flipping houses, real estate MFs, real estate EFs, home construction, hard money loans, fractional ownership, etc.
To a larger extent, they are the same. But they differ in a few aspects. Main one is that in wholesaling, the houses are purchased and sold without carrying out any repairs and renovations. Whereas in flipping houses, the houses are purchased, renovated and repairs are fixed and then sold.
Crowdfunding is one such online investment platform wherein money from several investors is pooled up and given as capital to other buyers. In this way, you don’t buy property but will help others buy.
Investors can reap the benefits like rent from the estate’s tenants, value appreciation of property, and get their portfolios diversified.