Investing in real estate can be lucrative and help you to diversify your investment portfolio. The trouble is you may not know where or how to invest in real estate. Here are some ways to invest in real estate, especially if you don’t have much capital.
Invest in real estate mutual funds
Investing in real estate mutual funds offers you an easy, affordable way to invest in various real estate market segments. You can gain diversified exposure to real estate with a relatively small amount of capital. Real estate mutual funds are professionally managed pooled investments in stocks, bonds etc. Your asset selection is broader than when buying REITs, and you can easily move from one fund to another. Mutual funds are less tax-favorable, less liquid, and have higher management fees than REITs or REIT ETFs.
Invest in real estate notes
A real estate note is a written agreement between a lender and a borrower that contains all the details of a property loan. Investing in real estate notes is another way to make money from real estate without having to own physical property. Once you invest in a real estate note, you are a lender, and you collect payment from a borrower. If you purchase a real estate note at a discounted rate, you can make more money than you invested. This is because the borrower has to pay back the full amount they originally promised to pay.
Give hard money loans
A hard money loan is a short-term lending instrument used by real estate investors to finance a project. It carries a higher interest rate than a conventional loan. House flippers or real estate developers may use this type of loan to renovate or develop a property and sell it for a profit. The value of the property is what determines whether it is worth your while making a hard money loan. You will focus on estimating what the value of the property will be worth once the renovation or development is complete.
Invest in REITs
A REIT is a corporation, association or trust that invests in real estate through mortgages or properties. The IRS requires REITs to pay out dividends to shareholders. They must consist of 90% or more of taxable profits. At least 75% of REITs must be in real estate, and at least 79% of gross income must come from mortgage interest, rents or gains from the property sale. The best REITs are very liquid.
Equity REITs own and invest in properties like office buildings, shopping malls, and apartments. They generate revenue by collecting rent so they can provide a stable income. Mortgage REITs invest in commercial and residential mortgages. They earn income from the interest on their investments.
Invest in real estate ETFs
An exchange-traded fund (ETF) is an investment fund that holds assets like stocks, bonds and commodities. As an investor in an ETF, you do not hold the underlying investment. You have an indirect claim and are entitled to a portion of the profits and residual value if the fund is liquidated.
Real estate ETFs are funds invested in REITs, real estate development companies, mortgage-backed securities and real estate service firms. They may hold physical real estate, such as commercial properties. ETFs are more liquid than mutual funds.
Become a “money partner”
The ‘money partner’ is the person in a partnership who has the capital to spare. The other partner may be called the entrepreneurial partner. The other partner is valuable to the ‘money partner’ even if they are cash-poor.
Being the money partner in a partnership involves taking a risk, so you need to protect yourself against those risks. Creating a thorough, reasonable and fair contract helps you to do so. You can also protect yourself by creating a Limited Liability Company (LLC). It limits your liability around real estate investments.
Provide a freelance real estate service
As a freelance real estate agent, you will buy and sell commercial or residential properties for clients. You will work on a contract basis but have similar responsibilities to working as an employee at a real estate firm. You will list properties, show them to prospective buyers, and negotiate sales prices. The qualifications you need will depend on the state where you operate. You will also need networking and business expertise.
There are a number of ways to invest in real estate when you don’t have enough capital to invest directly in a property. Investing in REITs, real estate notes, and real estate mutual funds are just some of the options. All the options have their pros and cons, so it’s worth your while to become more informed about them.