Venturing into real estate investment doesn’t have to mean taking on landlord duties. There’s good news if you’re keen on property market gains but prefer a hands-off approach. This guide on how to invest in real estate without being a landlord comes full of the latest trends and easy-to-follow strategies for investing minus the management hassle. From joining forces in real estate syndications to tapping into the digital realm of crowdfunding platforms, let’s get started.
How to Invest in Real Estate Without Being a Landlord
Investing in real estate can be a lucrative venture. Still, not everyone wants the hands-on responsibilities of being a landlord. Fortunately, there are several ways to invest in real estate without dealing with the day-to-day management of properties. Here’s an overview, updated with the latest trends and data.
Real Estate Syndications
Real estate syndication pools money from multiple investors to buy and manage properties, typically larger than one investor can afford. It’s a shared venture in commercial, residential, or industrial real estate, offering ownership, profits, and risk sharing. A sponsor manages the property and operations, while investors fund and earn returns proportional to their stake.
This passive investment strategy opens up opportunities in larger real estate projects, diversifying portfolios without direct management burdens. Expected returns include an annualized return of 15-20%, an internal rate of return of 10-15%, cash on cash return of 7-12%, and a total return of 100% over 5-7 years. If offered, preferred returns range from 6-10%.
REITs (Real Estate Investment Trusts)
Real Estate Investment Trusts (REITs) are like mutual funds for real estate, allowing investors to earn dividends from income-producing real estate properties without managing or financing them. Traded on stock exchanges, REITs must pay out at least 90% of their taxable income as dividends, making them attractive for income-seekers.
Moreover, they’ve consistently outperformed private real estate and stock markets, especially in recessions, with returns averaging 16.55% in rising interest rate periods, compared to 10.68% otherwise.
Mortgage note investing in real estate is where an investor buys the mortgage note on a property, becoming the lender and receiving payments from the homeowner instead of a bank. This method can offer fixed returns ranging from 12% to 20%, presenting a low-cost, passive income opportunity in real estate.
While it bypasses traditional property management, investors should consider the nuances involved. This investment type requires understanding the risks and opportunities, such as the potential for foreclosure or restructuring loan terms to secure returns while aiding borrowers.
Real Estate Funds
Real Estate Funds pool investor capital to diversify in property markets, much like mutual funds. These funds, managed by professionals, allow investors to gain exposure to various property types, including residential, commercial, and industrial, without directly managing the assets,
With an average 3.20% dividend yield and a 5.25% annual return over 10 years, these Real Estate Funds are a strong choice. Key players include Vanguard’s VGSLX with a 5.55% 10-year return, TIAA-CREF’s TCREX at 6.51%, Cohen & Steers’ CSZIX with 8.02% since 2014, and DWS RREEF’s RRREX holding a steady 6.17% over the same period.
Contract wholesaling in real estate, a low-cost entry strategy, involves a wholesaler contracting to buy a property and then assigning it to an end buyer for profit. This approach, focused on negotiation and market insights, sidesteps the complexities of property ownership and allows for quick income generation.
Real estate contract wholesaling can offer earnings from $5,000 to $15,000 per deal, enabling a wholesaler to make up to $45,000 a month with just 2-3 transactions. However, profits per deal vary; not all reach the $15,000 mark; with some yielding lower and others higher returns. Typically, rehabbers in these deals aim for a 10% to 15% return.
Subleasing allows a tenant to rent out their property, or a part of it, to another party. Ideal for those needing to move temporarily or wanting to reduce rent, this strategy is popular in both residential and commercial areas. Success depends on location, property type, and housing demand, and the original lease must allow for subleasing with the landlord in the loop.
However, subleasing also means taking on extra responsibilities. The original tenant, or sublessor, remains accountable for the property, rent collection, and any tenant-caused damages. If the subtenant defaults on rent or damages the property, the sublessor could face liabilities.
Join Crowdfunding Platforms
Real estate crowdfunding platforms allow individuals to collectively invest in big property projects, like commercial or residential developments, with smaller amounts. This approach diversifies investment portfolios and offers potential returns from property income or growth. These platforms handle the complexities, making investing in real estate with less capital easier.
The average annual return for these platforms, as of December 2023, is around 11% but can range from 2% to 20% depending on the platform and investment choices. These figures highlight the need for careful project selection and understanding of each platform.
Benefits of Investing in Real Estate without Being a Landlord
Investing in real estate has long been a popular way to build wealth and generate income. The best part? There are ways to reap the benefits of real estate investments without the hassles of property management and landlord responsibilities.
One of the biggest draws of real estate investment is the potential for passive income – money that flows in regularly without requiring constant effort. You can earn from real estate without daily involvement through the avenues we discussed. These options can provide regular income through dividends or interest payments, making them a convenient choice for investors seeking a hands-off approach.
Affordable Investment Options
Gone are the days when investing in real estate required large sums of money. With the advent of ways to invest in real estate without being a landlord, you can start investing with much smaller capital. This democratization of real estate investing opens doors for more people to invest in property projects, diversifying their investment portfolio without a hefty initial outlay.
No Maintenance Headache
Perhaps the most significant advantage of not being a landlord is avoiding property ownership’s maintenance and management responsibilities. When you invest in real estate indirectly, you’re not on the hook for repairs, tenant issues, or property upkeep. What this means is no middle-of-the-night emergency calls or dealing with tenant turnover. You get to enjoy the financial benefits of real estate without the logistical burdens that typically come with property management.
Investing in real estate without being a landlord provides a flexible, smart path to wealth and income growth. Options like real estate syndications, REITs, note investing, and crowdfunding platforms each offer unique opportunities and returns and open the door to real estate markets with less capital and hassle.
Perfect for both seasoned and new investors, this new era in real estate without being a landlord provides a straightforward path to diversify your portfolio and tap into lucrative potential, all with minimal hands-on involvement.
Frequently Asked Questions
Real Estate Syndications provide a unique opportunity for newcomers to the real estate market by offering a low-entry barrier to larger, more lucrative property investments. The key advantages include access to larger commercial or residential projects, professional management by experienced sponsors, and shared risk. This allows newcomers to gain exposure to high-value real estate with a smaller capital investment and without the complexities of direct property management.
Investing in REITs typically offers a more liquid and diversified real estate investment option compared to owning physical properties. While direct real estate investments can offer higher potential returns through property value appreciation and rental income, they also come with higher risks and management burdens. In contrast, REITs offer more stable dividend income, reduced risk through diversification, and greater liquidity since they’re traded on stock exchanges.
Mortgage note investing can offer a stable stream of income through regular mortgage payments. However, it’s important to understand the potential risks, such as the possibility of default on the loan and the intricacies of dealing with foreclosures. Investors in mortgage notes must be prepared to navigate these challenges, which can require a deep understanding of real estate finance and legal processes.
When choosing a Real Estate Fund, investors should consider factors such as the fund’s historical performance, the types of properties included in the portfolio, the expertise and track record of the fund managers, the fee structure, and the overall investment strategy. It’s also crucial to assess how the fund’s focus aligns with your investment goals, whether it’s income generation, capital appreciation, or portfolio diversification.
For beginners, contract wholesaling in real estate presents both challenges and opportunities. The main challenges include building a network of buyers and sellers, understanding market dynamics, and mastering negotiation skills. On the opportunity side, wholesaling offers a low-cost entry into real estate investment, the potential for quick profits, and valuable learning experiences in property valuation and deal structuring. Success in this area demands dedication, market research, and the ability to act swiftly on opportunities.
Reed Goossens is an Australian-born real estate entrepreneur, investor, author, public speaker, and an all-around good bloke. Reed got his start in real estate investing back in 2012 when he moved to the US.