How To Invest in Real Estate Without Buying Property

There is a common misconception that the only way to invest in real estate is to purchase properties. However, there are multiple ways to diversify your portfolio with real estate assets, without having to actually purchase a property.

Wholesaling Wholesaling real estate has grown in popularity throughout these past two years thanks to social media marketing. The term itself describes a type of property-flipping strategy where one investor signs a contract to purchase a property, thereby ‘locking’ the right to purchase, and then selling the contract to another investor.

Wholesalers generally play the ‘volume game’, meaning while the deal sizes are smaller, they make up for their efforts through high volume transactions. You’ll often see wholesalers search for homes that need renovations, which allow them to sell the contract to developers and activist investors that search for value-add opportunities.

However, there are actually multiple ways in how you can get involved in this process. Number one would be, of course, to actually sign the contracts and take on risks. The second option, which is what has been popularized by social media recently, is to search for contracts, and sell the rights to the contract to investors, similar to a real estate agent / broker. This means your source of income comes from a ‘finders fee’ that you negotiate.

This process of selling contracts can be extremely lucrative, especially recent times where many brokerage houses are hitting record-breaking quarters.

One of the main reasons this process is such a popular avenue into real estate is that anyone can get started, there is no licensing or training required by law. All you truly need is great negotiation and relationship building skills, along with a tenacity to get things done. REITs The abbreviation comes from Real Estate Investment Trust (REIT), which is a company that own or finance income-producing real estate assets. While REITs can often offer diversification across a variety of property sectors (such as retail, multifamily, etc.), you’ll also find REITs that specialize in a specific property sector, such as cold storage.

REITs operate similar to a mutual fund. Investors own shares of the REIT, and the REIT owns the investments it makes. The REIT is also required to pass on at least 90% of its taxable income to shareholders, allowing the company to avoid being taxed at a company level, and instead, REIT investors will only pay income tax for dividend earnings.

Here’s an excerpt from Investopedia: “The dividend payments that REIT investors receive can constitute ordinary income, capital gains, or a return on capital. This will all be broken down on the 1099-DIV that REITs send to shareholders each year. Generally speaking, the bulk of the dividend is income passed along from the company's real estate business and is therefore treated as ordinary income to the investor. This part of the dividend is taxed according to the investor's marginal tax rate.3" Source: https://www.investopedia.com/articles/pf/08/reit-tax.asp

This allows everyday investors - not just Wall Street - to benefit from valuable real estate. Investors reap the benefits of both dividend-based income as well as principal appreciation.

Private Equity This avenue is for accredited investors, and involves investors pooling their their money together to the private equity fund to make investments on behalf of the investors. Generally this is operated under a limited liability partnership, with a management group that is in charge of the operations. The managers are also incentivized with a ‘carry’, to ensure that they are acting on your best interests. The typical carry structure is called “two and twenty”, equating to 2% of the AUM as well as 20% of all profits.

Investing in private equity funds is long-term investments, as opposed to wholesaling and REITs. Your capital is generally locked by the fund for a minimum of 5 to 10 years, to ensure that the fund can operate as efficiently as possible.