By Dr. Peter Kim of Passive Income MD, Anesthesiologist, WCI Network Partner
When I talk to people about the benefits of investing in real estate , I often hear this response, “I would, but I don't want to be a landlord.”
While I believe that actively investing in real estate by owning rental properties is a proven path to creating wealth and cash flow, it is certainly not the only way to get the benefits of real estate investing. And honestly, being a landlord is not for everyone.
In fact, as I've gotten busier with my various ventures and activities with my family, I've found myself leaning more and more toward passive real estate investing. At this point in my life, it seems to provide the best return of capital for the time spent of any investment I've made.
So why don't more people invest in passive real estate opportunities?
- They don't know the different options available to them.
- They don't know how to do the proper due diligence.
Well, this post will help you with reason #1.
Here are five ways to invest in real estate without being a landlord.
#1 Invest in REITs
Real Estate Investment Trusts (REITs) are companies that hold real estate and allow their investors to buy and sell their shares so that the trust could pay dividends and earn value on the properties in the long term.
REITs can either be publicly or privately traded, and the trade is conducted in the form of equity, not debt. Most of these companies have multiple favorable cash-flow generating properties that are worth millions or billions in value.
So as an investor, you don't own the properties directly; you own a share of the company that owns and operates the properties.
For investors looking to start building a portfolio, going with the REITs is an easy way to get started. You can simply do it through your current trading platform. It is also quite liquid as you can simply move in and out of the investment with a simple click of a button.
However, there are some downsides as you might miss out on many of the direct tax benefits of investing in real estate, like depreciation.
#2 Real Estate Syndications
This is yet another effective way of investing in real estate without buying a property. In a syndication, investors pool their financial resources to invest in big projects which they couldn't have purchased or managed on their own.
For example, a sponsor might present a deal where they're purchasing a 350 unit apartment building and is looking to raise $15 million from investors to complete the deal.
As an investor, you invest with a sponsor who puts the deal together and runs the deal. You're expected to do your due diligence before investing, and once you're in a deal, expect to be on the ride the entire time.
Depending on the specifics of the deal, they can run from 3-7 years. As an investor, your only expectation after making the investment is to check for deposits into your bank account and file taxes on it each year.
#3 Invest in Real Estate Funds
Syndications are often thought of as single properties or deals. A real estate fund, however, will take their capital and invest in multiple properties, all under the umbrella of the fund.
As an investor, you invest your capital, and the fund operators will go out and purchase multiple deals.
The benefit to you as the investor is that a single investment results in diversification across multiple properties and locations. The downside is that the fees are often a bit higher, but that's the tradeoff for diversification.
#4 Note Investing
Notes in simple terms can be referred to as a promise to pay. For instance, a personal check in your name is a note. When a property is sold, the document promissory note defines the terms of the loan.
Although not secured by collateral, the note is considered to be the safest way of investing in real estate. In this investing, the investor purchases the secured debt and becomes the lender. Investors buy notes on discount and then move them along to lenders.
You can invest in notes in different ways:
- Performing Note Investing – buy to hold and buy long sell short.
- Non-performing first-lien investing, and non-performing 2nd Lien Investing.
Each of these types is unique in their way and offer potential for investors who are starting in real estate.
#5 Debt/Hard Money Loans
Hard money loans are also known as a bridge loan, and they are used for short-term lending. Real estate investors that are looking to finance a project use these loans to get things started. Most house flippers use this tool to renovate or develop a property so that they can earn a profit. Private lenders often issue these loans.
Other than offering convenience, these loans offer flexible terms since they are being handed out by a private lender. Similarly, when it comes to collateral, it is up to the lender to decide whether they want to give you a leeway or not.
If you want to become an investor, you need to pose yourself as a lender and give out money to borrowers on your terms. You can either ask for a share or a fixed percentage according to your needs.
Real estate investing is much more than buying and selling properties. It is an entire industry which offers up a ton of ways to get involved according to your goals and willingness to commit time and effort. It is up to you to decide which path you want to go.
The key is to understand how to do the proper due diligence with these deals up front. Since you're relying on others, it makes sense to understand who you're investing with and what you can expect from a return standpoint.
Different ways to learn how to do the proper due diligence include educating yourself through books, courses, and conferences. And there's always learning by experience.
If you'd like to learn how to do the proper due diligence in a short period of time, feel free to check out our course and community, Passive Real Estate Academy.
How have you successfully invested in real estate without being a landlord? Comment below!