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7 Ways to Invest in Real Estate Without Buying Property

Barbara Friedberg

Real estate investing made easy.

With the invention of real estate investment trusts in 1960, real estate ownership is a mouse-click away. REITs own income-producing real estate in various sectors. These investments are governed by the Securities and Exchange Commission, trade on major stock exchanges and pay regular dividends. In fact, REITs are required by law to pay out 90 percent of their income in dividends. Beyond REITs, there are numerous ways to own real estate, without buying a property.

Equity REITs

Buy an equity REIT in the same way you would buy a share of stock or an ETF. An equity REIT owns the asset. You can buy a diversified REIT that owns a smattering of properties across various sectors such as Vanguard's REIT ETF (ticker: VNQ) or go international with Vanguard's Global ex-U.S. Real Estate ETF (VNQI). For sector enthusiasts, hone in on specialty REITS such as commercial, industrial, health care facilities, timberland, self-storage, student loans and more. "REITs are my favorite way to invest in real estate as they solve real estate's biggest drawback, liquidity," says Chance Butler, CEO of InvestingUnder35, an independent financial planning firm in Queen Creek, Arizona.

Mortgage REITs

Mortgage REITs finance the income-producing real estate by either buying or originating mortgages and mortgage-backed securities. The mREIT owner then enjoys income from the interest on these investments. A smaller slice of the REIT pie, mortgage REITs make up less than 10 percent of the REIT market. In the current economic environment, as interest rates rise, mortgage REITs might benefit from higher interest rates. Several mortgage REITs include Apartment Investment and Management Co. (AIV) and commercial mortgage REIT Capstead Mortgage Corp. (CMO). For investors, mREITs give you access to the mortgage market with the liquidity and transparency found in the stock market.

Mutual funds

Most REITs charge a commission at purchase and sale. That makes them expensive when used in dollar-cost averaging or for frequent purchases. If you prefer to invest regularly or are deploying money in a retirement 401(k) or 403(b), then you might take a look at real estate mutual funds. Real estate mutual funds typically invest in REITs of various flavors. Similar to buying a REIT outright, you can purchase a real estate mutual fund that invests in variety of both U.S. and international REITs such as the TIAA-CREF Real Estate Securities Fund (TIREX), the No. 1 ranked real estate mutual fund by U.S. News & World Report.

Equity crowdfunding

Crowdfunding is a concept opened to real estate investing by the Jobs Act of 2012. Simply, real estate developers find individuals (typically with a high net worth) who then directly invest in their projects. It's a way for the individual investor to pick and choose the type of property and/or geographic location for their real estate investment dollars. Popular equity real estate crowdfunding platforms include RealtyShares, Fundrise and RealtyMogul. "Through RealtyShares, an investor can browse a list of carefully curated commercial real estate investments, invest with significantly lower minimums and earn returns without the hassles of direct ownership," says Amy Kirsch, vice president of investor relations at RealtyShares.

Debt crowdfunding

PeerStreet, is a marketplace where accredited investors can invest in real estate loans. This crowdfunding debt platform, in conjunction with financial institutions, funds various real estate purchases. The investor can own a portion of the loan and receive a cash flow of the debt payments. This real estate lending platform is like the Lending Club and Prosper concept of lending to individuals by giving individual investors the opportunity to buy a portion of the loans. Similar to the equity crowdfunding sites, debt crowdfunding offers investors the opportunity to build a loan portfolio across diverse property types, geography and maturity. CrowdStreet is another company in the real estate debt lending environment.

Limited partnerships and private placement

Real estate private placements are direct ownership in a property or properties, typically as a limited partner. They are generally illiquid and have relatively high investment minimums and are attractive to investors with long-term investment horizons, says Steve Schwarzbach, certified private wealth advisor at Icon Wealth Partners in Houston. Real estate private placements and limited partnerships, for high net-worth individuals, take advantage of the illiquidity premium. Because they don't trade on typical markets, they offer higher returns. Illiquidity is the price you pay for a crack at higher returns.

Interval funds

Interval funds are a hybrid investment that offers a combination of liquid and illiquid real estate investments. Fund managers are free to use both public and private securities to build the real estate portfolio. "The availability of these mutual funds has dramatically increased over the past few years, and they now offer investors additional asset classes that were historically unavailable to all but a few," says Benjamin C. Halliburton, chief investment officer at Tradition Capital Management in New York. "They represent the missing cards to add to your deck of stocks and bonds. You can now play the game with a full deck as the big institutions and uber-wealthy have done for years."

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