You don’t need to buy a property to invest in real estate. Read to learn how to invest in real estate without buying a property in various ways.
Real estate is one of the most profitable forms of investment. Many real estate investors buy investment properties to enjoy the benefits of this lucrative venture. However, to be a property owner, you need to have a substantial amount of capital. The good news is that there are ways to invest in real estate without having to buy an investment property.
Table of Contents
Many people think you need to be a property owner to become a real estate investor. They are not really wrong, though, because when you become a real estate investor, you essentially own an investment property. However, you don’t need to own the property entirely—you may just choose to own a share of the property. This way, you don’t need to invest a huge sum of money.
If you don’t have a large amount of capital on hand, there are other ways to invest in real estate without buying an actual property. If you don’t want to deal with the duties and responsibilities of being a landlord or don’t want to buy, fix, and resell a home, just consider other forms of real estate investment options, which we will discuss in the following sections.
Whether or not you plan on buying a physical investment property, you still need to understand the real estate market that you’re investing in. Mashvisor offers accurate real estate data and analytics to help you analyze the market thoroughly, allowing you to choose the right market to invest in.
Real Estate Investment Trusts (REITs)
One of the most common ways to invest in real estate without buying a property is through a real estate investment trust, also known as REIT. REITs are companies that own and manage real estate and other assets, like mortgage bonds. For a company to qualify as a REIT, the majority of its assets and income must be related to real estate.
There are also standards and rules that a company must meet in order to be an eligible REIT company. For instance, the company must invest at least 75% of its assets in real estate. It is also required to get at least 75% of its gross income from mortgage interests or property rent. It also needs to pay at least 90% of taxable income as dividends to shareholders.
Pros and Cons of Investing in REITs
If you want to know how to invest in real estate without buying a property, then investing in REITs is a great option. However, it has its advantages and drawbacks. As a real estate investor, it’s essential to understand the benefits and risks of a particular investment before deciding to invest your hard-earned money in it.
This allows you to know what you are getting yourself into. By understanding the pros and cons of an investment, you can mitigate your risks efficiently.
Benefits of Investing in REITs
REITs are a popular form of real estate investment strategy for those who don’t know how to run their own real estate investment. Individuals and institutional investors choose to purchase REIT shares to include real estate in their investment portfolio. There are many reasons why you should also consider investing in REITs.
Here are the benefits of investing in real estate investment trusts:
Available to Any Investor
REITs are available to any real estate investor. Whether you have a large or small amount of money as capital, you can most likely qualify to invest in REIT. In most cases, REITs have a low barrier to entry. This means you can be an investor if you have enough cash to buy at least one share of a publicly traded REIT.
This is one of the reasons why REIT is a recommended form of real estate investment, especially for beginners who can’t afford to buy a property. New investors who want to try investing in real estate also choose to start with REIT, especially if they don’t have sufficient knowledge on how to run a real estate business.
Publicly Traded REITs Are Liquid
If you prefer an investment that is pretty much liquid, then REIT is a great option. In general, REITs offer liquidity, which means you can buy and sell them pretty quickly. This benefit is not usually available if you choose to invest in tangible real estate assets.
Opportunity to Earn Passive Income
As a REIT investor, you’ll be able to earn passive income on your investment. Unlike buying an investment property where you need to spend time and effort getting your business off the ground, you don’t need to do anything when you invest in a REIT. Investing in REIT can give you a chance to earn passive income without the need to manage your own property.
Drawbacks of REIT Investing
While investing in REIT can be beneficial, there are also downsides to this form of real estate investment. It’s important that you know these disadvantages so you can make calculated risks.
Here are the drawbacks to investing in REITs:
Dividend Taxes
When you receive your REIT dividends, you need to pay income tax on them because they are considered taxable income, just like ordinary income. On the bright side, you’ll enjoy tax benefits related to dividend income. However, if you have a substantial stake in a REIT, then you may incur a sizable amount of tax bill.
Subject to Volatility
Just like any real estate investment, REITs are also subject to volatility and real estate trends may affect the value of your shares. Real estate market trends may fall in and out of favor, and this can have a huge impact on your overall investment.
Possibility of High Fees
Depending on which REIT company you invest in, there’s always a possibility that you will be charged high fees. For instance, some REITs may have high upfront fees, while other investors need to pay for sales commissions. In addition, some REITs also charge annual management fees, while others may take a percentage of your profits.
Online Real Estate Investment
Another way to invest in real estate without having to find the best investment property to buy is through online real estate investment platforms. These platforms pool funds from several investors and invest in real estate opportunities. The idea is to gather sufficient funds so that they would be able to afford to invest in commercial or residential properties.
This type of investment is sort of similar to REIT. Your investment may be used to purchase residential property, apartment buildings, commercial real estate, multifamily units, and more. Just like REITs, you will receive dividends and distributions. Plus, you also get to enjoy long-term appreciation of the properties you own a share of.
Pros and Cons of Investing in Online Real Estate
If you don’t like to get your hands on actual real estate investing or don’t know how to manage a property, you can still enjoy the benefits of venturing into real estate by investing online. The idea of online real estate is to pool funds from several investors, so a single investor doesn’t need to spend a huge sum of money to get involved in real estate investing.
Benefits of Investing in Online Real Estate
Online real estate is a great way to try real estate investing if you don’t know how to manage your own investment property or if you don’t have enough money to buy your own property. In fact, this is another efficient way how to invest in real estate without buying a property.
There are many reasons why you should consider investing in online real estate. This investment allows you to be a real estate investor without buying a property.
Here are the pros of investing in online real estate:
Accessible to Beginners
Investing in online real estate is more accessible to beginners because it allows you to have a share of an investment property without buying an actual property yourself. In the past, private real estate investments were only available to investors with a high net worth who could afford to buy a property.
With changes in real estate laws and the availability of online crowdfunding platforms, however, real estate investing has become more accessible even to those small-time investors. So if you have the money to invest but don’t know how to run a real estate business, it’s best to start with an online real estate investment.
Small Investment Size
A traditional real estate investment typically needs a large amount of cash for you to get started. Plus, you also need to be knowledgeable about managing a rental property, and you need to do a proper rental property analysis to ensure profitability. This can be a lot of hard work—it can be time-consuming and totally exhausting.
If you don’t know how to manage your own rental property and you don’t have money to buy one, you can start small by investing in online real estate. Most online crowdfunding real estate companies only require as little as $500. This allows you to earn passive income in the form of dividends and distributions.
Geographic Diversification
If you’re buying an investment property, you will be mostly limited to your home state or city unless you plan to hire a property manager to manage your real estate investment. Another great thing about investing in online real estate is that you can diversify your portfolio geographically. This means that you can easily invest in other states and cities as you want.
Related: 20 Best States to Buy Investment Property in 2023
Before choosing a geographic location for your online real estate investment, however, it’s important to know the market trends in the area. That is why we recommend that you study and analyze real estate data in the location that you’re eyeing to invest in. The good news is that you can easily find a competitive market analysis with the help of Mashvisor.
Mashvisor’s Investment Property Search With Heatmap
Mashvisor provides comprehensive real estate data and analysis that can help you decide whether a location is optimal for investing in real estate or not. This will be a big help if you’re trying to find the best location that can provide the most profits.
Start finding the best real estate market with the help of Mashvisor. Start a 7-day free trial now.
Risks of Investing in Online Real Estate
As mentioned, risks are always expected in any form of investment, and online real estate is no different. Before you start looking for an online real estate crowdfunding company to invest with, it’s important to understand the risks that you are taking.
Here are the downsides to online real estate investing:
Lack of Control Over Your Investment
Since you are not the one managing your investment, you won’t have control over it. If you want to control how your investment goes, then online real estate crowdfunding may not be the best option for you—buying your own income property is. It’s because once you invest in online real estate, the development and management of the property will be done by someone else.
Your Investment Lacks Liquidity
Unlike a REIT investment, an online real estate investment is considered an illiquid kind of investment. You cannot easily sell your shares for cash if you need the money. Usually, if you need to cash out on the investment, a buyer needs to be lined up for the property that you’ve invested in. This takes time, and sometimes, the value of your investment also depreciates.
Lower Relative Returns
In general, your returns from an online real estate investment will be typically lower than what you would get from a standard real estate investment. Also, if you invest a small amount of money, you can expect that your returns will also be relatively low. Moreover, it’s important to note that the developers and property managers will also get a share of the income.
Hard Money Loans
If you have enough money to buy an investment property, but you don’t want to get your hands dirty or don’t know how to manage one, you have the option to offer hard money loans. Hard money loans, also known as bridge loans, are loans provided by an individual to a real estate investor to finance a real estate investment project, typically a fix-and-flip.
Hard money loans are another great investment option without buying an actual property for yourself. All you have to do is provide the loan based on the value of the investment property being bought. Also, you need to know how to evaluate the property to ensure that what you are financing will really make a good investment so that the borrower can pay back what they owe.
Typically, a hard money lender provides around 65% to 75% of the property value and earns through interest. It’s worth noting that the interest rates of hard money loans are significantly higher than most conventional loans. This means that with the right investment property and a trusted borrower, you can earn substantial returns.
Pros and Cons of Lending Hard Money Loans
Hard money loans are one of the most lucrative real estate investment options without buying a property and managing it yourself. This real estate investment alternative is best for investors who have a sufficient amount of cash to lend. To be a successful hard money lender, you should know how to deal with borrowers and how to study the market to make the right decision.
Advantages of Providing Hard Money Loans
Investing in real estate using this strategy is best if you don’t want to buy, fix, and sell a property yourself or if you don’t like the responsibilities of being a landlord. This type of investment strategy is advantageous for those who don’t want to spend their time managing their own investment property. It’s another best way to invest in real estate without buying a property.
Here are the other reasons why you should consider investing as a hard money lender:
High Returns
Hard money loans typically have high interest rates, ranging from 8% to 15%—sometimes even higher. These are loans provided directly to a real estate investor, so you have the freedom to choose which investors to lend money to. The return on investment on hard money loans is worth the risk, especially if you know that you’re lending to a trusted borrower.
Short-Term Loans
Hard money loans are usually short-term loans that range from three months to three years, depending on the terms that you set. Since these are short-term loans, you can get your investment back in a shorter period of time without having to do the manual and tedious work of being an actual property owner.
Ability to Set Your Own Terms
To minimize your risks, you can set your own terms that are more favorable to you. For example, you may require the borrower to pay a higher down payment. You can also choose to lend to investors who have more experience and success in real estate investing or set a higher interest rate and shorter loan term that you’re more comfortable with.
Disadvantages of Investing in Hard Money Loans
Providing hard money loans can be very risky. In fact, it is a real estate investment option that has an increased risk of exposure. Before deciding to lend your money to real estate investors who are buying a property, make sure to understand the risks and that you’re ready to take them.
Here are the disadvantages of investing in hard money loans:
High-Risk Investment
Hard money loans are typically taken by real estate investors who have experience in investing in real estate, but for some reason, couldn’t qualify for a conventional loan. In most cases, borrowers who choose to take a hard money loan are those who have low credit scores. This is the reason why lending hard money loans is a high-risk investment.
Success Depends on Property
The success of a hard money loan will depend on the investment property being bought. Since the property secures the loan and not the borrower’s finances, hard money lenders need to know how to evaluate the property before approving a loan. This means that if you venture into hard money loans, you should know how to study the market and analyze the property.
Related: Real Estate Data Analytics Is What You Need to Get Rich
To help you decide whether the property will become a successful investment or not, you can work with a reliable real estate investment platform like Mashvisor. For example, if the borrower plans to buy a rental property, you can use Mashvisor’s rental calculator to know whether or not the property the borrower is buying will be a profitable investment.
Mashvisor also offers access to a cap rate calculator where you can calculate the potential returns of the property based on its value. What’s more, the platform also provides a comprehensive rental analysis, so you can have an overview of how profitable the investment will be when used as a rental property.
If you’re ready to analyze an investment property, start a free trial with Mashvisor to see how it works.
Immediate Decision is Needed
One reason why many investors who are in a hurry prefer to take a hard money loan instead of applying for a conventional loan is that they can typically get quick approval. With its fast turnaround, you are expected to make an immediate decision based on the documents provided by the borrower and your own research. It’s the reason why you need to work with Mashvisor.
Related: The #1 Real Estate Data Provider for 2023
If you have to analyze an investment property manually, it would take a lot of time and effort, and you might lose your opportunity to finance a profitable investment. The good news is that when you use Mashvisor, you can easily find all the real estate data that you need in as little as 15 minutes.
Invest in Real Estate Without Buying a Property
As discussed, it’s possible to invest in real estate even if you don’t want to buy your own investment property. The methods we shared are effective ways how to invest in real estate without buying a property, and you should consider one of them if you want to try real estate investing.
Make sure, however, that whatever real estate investment strategy you choose, you will still conduct your own research to help you make the right decision. To mitigate your risk, it’s still important to study the real estate market you’re planning to invest in, even if your investment is just via online real estate or through providing hard money loans.
Additionally, you should also partner with the best real estate analytics platform that can provide you with reliable information. Mashvisor will make your life easier by giving you all the real estate data that you need in a shorter amount of time.
Wanna know how Mashvisor works? Schedule a demo now.