How can I benefit from investing in real estate without becoming an owner?
Real estate remains a strong investment, even with slowing prices.
But owning property can be a hassle. A huge amount of capital is tied up in a handful of properties. And you have to deal with the logistics of maintaining and managing that home, office or apartment.
Investing in real estate is a great way to diversify a portfolio, says Jeff Rose, a certified financial planner based in Nashville.
“But you’ll only want to have 5% of your portfolio in real estate,” he says. “Up to 10%, that would be on the higher side.”
Investing in real estate stocks through ETFs, mutual funds or real estate investment trusts provides exposure to the upside value of real estate appreciation.
But this kind of volatility is not for everyone. Another option is investing in real estate risk, which comes with more stable returns.
Real estate equity
Real estate investment trusts, or REITs, are a common way to diversify into real estate stocks. REITs are publicly traded companies that own income-producing real estate—office buildings, hotels, apartment complexes, shopping centers—that give people the opportunity to invest in their real estate portfolios.
REITs are a way to hold a variety of properties as easily as buying stocks and provide income based on dividends. But they come with a higher level of risk than say, an index fund.
“Anytime you’re looking at a publicly traded REIT, which is basically a stock, there’s more risk involved,” Rose says. “They focus on an area. It could be a property type or it could be a geographic area, and if that sector or area takes a hit, you feel it.”
Rose suggests taking advantage of REITs by investing in them through ETFs or mutual funds to further diversify your exposure.
“The simplest way to invest in real estate is through a mutual fund or ETF,” says Rose.
A real estate ETF, such as Vanguard’s VNQ, offers investors exposure to publicly traded REITS and other real estate investments. Similarly, iShares’ IYR offers domestic real estate stocks and REITs.
Mutual funds are another way to diversify a long-term real estate investment strategy. T. Rowe Price Real Estate Fund (TRREX), with $5.3 billion in assets, is a giant among actively managed real estate funds.
Newer online platforms such as Fundrise, Rich Uncles or Realty Mogul allow investors to get into diversified real estate portfolios for much less than big funds.
Rich Uncles lets you invest in their own REITs for as little as $500, or in their new REIT student housing, for example, with a minimum investment of $5. On Fundrise, another platform with its own REITs, the minimum investment is $500.
Realty Mogul offers access to private equity deals or you can invest in its REITs, which have a minimum investment of $1,000.
While these can provide steady investment returns and dividends, they are illiquid and investors should not expect to sell quickly. But online platforms can provide more visibility into what you’re buying.
“I like investing on online platforms because I can see the properties I’m investing in,” says Rose. “Typically, if you’re buying an ETF or a mutual fund or REIT, it can be harder to see what you’re buying.”
And no matter how you invest, he says, “you have to know what kind of real estate you’re investing in.”
Real estate debt
Another way to earn steady passive income through real estate is to invest in someone’s mortgage. Using a platform called PeerStreet, investors can back high-interest loans that offer regular fixed income payments.
“A lot of people want exposure to real estate without that equity-style risk,” says Brett Crosby, co-founder and CEO of PeerStreet. “We’ve made it accessible, and some people are much more comfortable with that level of risk.”
Here’s how it works: PeerStreet buys first lien mortgages from a network of private lenders. Investors can search the site for investments and select investments based on criteria such as term, yield and home loan-to-value ratio. Options are updated daily.
Alternatively, you can opt for automated investing by pre-selecting details that place you in investments that match your criteria. Investments have returns ranging from 6% to 9% and the typical deal on the site is between 6 and 36 months.
Other real estate debt investment platforms, such as AlphaFlow, offer a portfolio of real estate loans instead of investing in individual loans.
While mortgage-backed investing is nothing new, in the past it was very difficult for individuals to invest. “If it goes bad, you need a team in place if you have to shut down,” Crosby says. “We handle all of that. We’ve taken an active investment and made it passive.”
While the company is working to expand its offerings to all investors, SEC regulations currently limit investing with PeerStreet to accredited investors. In order for an individual to qualify as an accredited investor, they must have earned an annual income of more than $200,000 ($300,000 annually with a spouse) for the past two years, with a reasonable expectation of the same level of income in the future. Also, an individual with a net worth of more than $1 million, excluding the value of a primary residence, qualifies.
CNNMoney (New York) First published September 13, 2018: 1:37 pm ET
