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Anyone who follows the stock market will have witnessed its dramatic ups and downs over the past few years. In response, more people are looking to diversify their portfolios.
One way to do so is by investing in real estate – an asset class that has historically had very little correlation with stocks and bonds and performs particularly well in times of inflation.
However, owning real estate is not for the faint of heart. Most people do not have the time or expertise needed to manage rental property personally.
As an alternative, these investors will want to look at passive real estate investments, which means owning real estate and generating cash flow without buying and actively managing the property.
In this article, we look at the many ways to invest in real estate without buying the property directly:
Can You Invest in Real Estate Without Buying Property?
Yes, it is possible to invest in real estate without buying property.
Owning real estate without buying property is more commonly referred to as “passive” real estate investing. It’s “passive” because you do not actively have to manage the day-to-day operations.
Passive real estate investing is when someone makes a capital contribution and then sits back and entrusts the sponsor (or other real estate-related company) to manage it on their behalf.
As the property (or portfolio of properties) generates income, distributions are made to the passive investors.
Ways to Invest in Real Estate Without Owning Property
There are multiple ways to invest in real estate without owning property.
Here’s a more detailed look at the various strategies investors can consider:
Invest in a REIT
A real estate investment trust, or REIT, is an entity that combines the capital of many real estate investors to acquire a portfolio of real estate investments under professional management.
When someone invests in real estate investment trusts, they are essentially purchasing stock in the company that owns those real estate assets. They are not investing in real estate directly.
Example: Think of it like buying Apple stock. When someone buys Apple stock, they aren't purchasing specific Apple products, but rather shares of the parent company that manufactures and sells the Apple products.
REITs can be publicly or privately traded, but in either case, the federal government requires them to return 90% of cash flow to investors quarterly.
Liquidity: One of the benefits of investing in a REIT is that it allows investors to preserve their liquidity. Shares can be purchased and sold as easily as any other stock.
Low barriers to entry: Investors can usually buy individual REIT shares for less than $100
Limited tax benefits: The primary downside to investing in a REIT is that people do not own any real estate. They own shares of the company that owns the real estate and, therefore, cannot take advantage of the tax benefits associated with real estate investments.
Lower returns: Due to their size and the types of assets that REITS buy, typical returns for REITs are between 5-15%, compared to Private Real Estate, which can be much higher
Volatility: Public REITS have been shown to have a high correlation with the broader stock market - this means that investors might not get one of the key benefits of real estate investing - diversification
Limited transparency: Due to their size, REITS need to hold many assets and don’t provide much insight into the tangible operating performance of their assets, which means limited transparency of the underlying real estate holdings
Invest in Offline Real Estate Syndications
Syndications are another way of pooling capital to co-invest in real estate.
The distinction here is that syndications are usually formed to invest in a specific property – for example, one the sponsor has already identified for acquisition. The sponsor will have already crafted a business plan to optimize the real estate's value, allowing the investors to understand the nuances associated with that deal.
Easy to compare investments: Because people are investing in a known asset, they can look at the specifics of that deal and evaluate it relative to other investment opportunities. For example, someone can look at the cap rates, targeted IRR, and cash-on-cash returns for investing in Multifamily Property A versus Multifamily Property B – two deals that may be of similar size and scale but spearheaded by two different sponsorship groups.
Education: Real estate syndications are generally for specific assets, and sponsors will provide a detailed business plan with research and analysis to give investors confidence in the investment. This means you can learn much about real estate markets, sponsors, and assets.
Requires trust and confidence in the sponsor: If the deal goes sideways for some reason, investors have very little recourse and may lose all of their money. There is no asset diversification to mitigate risk, and passive investors are only repaid after the debt providers have been repaid.
Limited liquidity: Typically, it is challenging to withdraw your investment in syndication. Redemption is sometimes possible but varies case by case.
Invest in Tokenized Real Estate
Investing in tokenized real estate is still relatively new compared to the other passive real estate investment strategies outlined above.
However, it has the most potential for future growth. Once people understand how it works, investing in real estate without owning property becomes a very compelling way.
Investing in tokenized property is similar to investing in a real estate syndication. However, instead of receiving paper documents certifying ownership interest in that LLC, the real estate investor receives a token representing their underlying membership interests.
This is beneficial because tokens are created by smart contracts that run on the blockchain. They can have embedded logic in them (like who can own that token) and are programmable with other smart contracts - sort of like lego pieces that can be bundled together.
Lower barriers to entry: Unlike traditional syndications, which typically require at least $25,000 to invest (due to the complexity and manual process), tokenized real estate investments can allow investors to participate at lower minimums (as they are far more efficient to manage for issuers and investors). For example, investors can purchase a single token at HoneyBricks for $100
Improved liquidity: One of the primary draws to investing in tokenized real estate is that the tokens are stored on a blockchain, which allows the tokens to be more easily purchased, sold, or traded compared to ownership interests in a traditional syndication or fund. After the initial hold period, investors have greater liquidity. Investing in tokenized real estate is also an excellent way for people to gain exposure to institutional-quality real estate assets that would otherwise be cost-prohibitive.
Better efficiency: Because tokenizing investments are built on blockchain technology, many of the traditional intermediaries (like attorneys, real estate agents, and brokers) for investments are removed or streamlined. This makes transactions much more efficient and quicker for investors.
Security and transparency: Tokens use a distributed ledger that provides an indisputable ownership record. Anyone can view every transaction, which creates transparency to claims such as who owns an asset.
Limited digital asset education: With tokenization being a relative newcomer to the real estate investing world, it hasn’t reached the investing mainstream yet. While there are many benefits to tokenization, there is a lot to learn about how it works. Like with any breakthrough technology, it will take some time to be adopted by the masses.
Evolution of blockchain infrastructure: While there are a lot of exciting technologies and different ways to build blockchain infrastructure, this poses some risks to tokenization platforms that build on a network that could become obsolete in the future. HoneyBricks is proud to be built on Polygon, which is part of the Ethereum ecosystem - the biggest and most widely adopted programmable blockchain.
Changes to federal legislation in 2012 have led to the rise of online real estate crowdfunding platforms.
These platforms allow sponsors to raise both debt and equity for their real estate syndications or funds.
Using an online platform provides greater exposure to their deals, which translates into access to more investors who can often invest with lower dollar amounts (sometimes with as little as $5,000).
It is important to note that real estate crowdfunding is not an actual investment. Instead, these crowdfunding platforms are merely a vehicle by which people can passively invest in real estate assets.
Low barriers to entry. As noted above, many platforms allow people to invest in real estate with as little as $100 or less (vs. traditional syndication which may require a minimum $50,000+ investment).
Risk mitigation and portfolio diversification. Because of the low barriers to entry and nominal investments required, those who invest on crowdfunding platforms can invest smaller dollar amounts in more deals. They can invest in a range of asset classes, geographies and with different sponsors – thereby mitigating risk and diversifying their portfolios.
Platforms are user-friendly. Crowdfunding platforms tend to be very user-friendly, which allows people to compare deals easily and invest rather quickly.
Platform risk: There’s always the risk that the platform could shut down for financial reasons. Whether you lose your assets if the platform falters depends on how your investment is structured and the platform's contingencies.
Limited liquidity: Unlike tokenized real estate investing, which often involves the ability to leverage a secondary market to boost liquidity to investors, many real estate crowdfunding platforms don’t offer a quick path to liquidating your investment.
When investing in online platforms, it's essential to have a good process. This video outlines a quick framework that you can use to evaluate online real estate investments.
Invest in Hard Money Loans
Hard money loans are typically utilized by borrowers who cannot obtain sufficient traditional financing for their projects. They’re most often used by fix-and-flip investors, wholesalers, and others who need short-term construction financing.
Hard money loans are originated outside of the traditional banking infrastructure and allow borrowers to move quickly on acquisitions or for other purposes where time is of the essence.
High returns: Investing in hard money loans can be very lucrative. These loans often charge 12.5% interest or more, a return far more significant than someone might be able to earn elsewhere.
High risk: Because hard money loans carry high-interest rates, they are generally used by borrowers as a last resort. If the borrower is unable to execute their business plan as intended, they may default on the loan. In a worst-case scenario, they might be forced to foreclose on the property. Unless an investor is comfortable with the possibility of taking over the deal from the sponsor (i.e., shifting from a passive to an active investor), this investment approach is generally not recommended.
Invest in Real Estate Notes
Real estate notes are the loans people typically use to buy or improve property. Essentially, this promissory note is a document signed by the borrower who is pledging to repay the loan pursuant to certain conditions. For example, at what rate, repaid over a certain period of time, or using certain intervals for repayment.
Real estate notes are different from mortgages, but the two go hand-in-hand.
There are several kinds of real estate notes:
Secured loans are those collateralized by a tangible asset, in this case, a piece of physical property. If the loan is unsecured, there’s no collateral for investors to recover.
Private notes are made by individuals or small companies, whereas more traditional lenders make institutional notes.
Consistent, predictable income: Borrowers will make principal and interest payments each month for an extended period of time. This provides consistent, steady cash flow for investors (assuming the borrower pays in full and on time).
Risk of borrower default: As was the case with a hard money loan, those who invest in real estate notes will want to proceed with caution. There is always the risk that the borrower will default. For that reason, investors should know where their loan stacks up relative to other loans (i.e., their lien position) and what recourse they have if the borrower defaults. Most will only want to invest in collateralized notes that are backed by real property.
Invest in a Real Estate Mutual Fund
A real estate mutual fund is a type of investment fund that is focused primarily on investing in securities offered by private real estate companies.
They are often confused with REITs, but the two are decidedly different. Whereas REITs must be registered with the Securities and Exchange Commission (SEC), real estate mutual funds are exempt from SEC oversight and, in turn, provide greater flexibility.
Real estate investment funds are generally spearheaded by sponsors who have significant real estate experience.
The fund manager will carefully analyze deals and then, based on the fund’s parameters, will utilize investors’ pooled capital to acquire those properties. Funds can be focused on specific geographies, asset classes, asset types, and more.
Risk mitigation: Investing in a real estate mutual fund is a way to mitigate the risk associated with investing in a single asset. Whereas real estate syndication is usually structured to raise capital for a specific deal, funds are raised to invest in multiple deals. Rather than putting all of their eggs in one basket, fund investors generally have exposure to several properties.
Preferred returns: Real estate mutual funds are also attractive because they tend to provide investors with a preferred return. This is in addition to their pro rata share of the fund’s overall net profits. They earn this before the fund operator can start taking their share of the profits, which helps to keep all parties’ interests aligned.
Lack of deal clarity: A significant drawback of real estate mutual funds, however, is that many are “blind funds.” This means that the investors generally do not know what the sponsor will be investing in (in terms of specific properties). This means that investors must trust the fund operator to make solid investment decisions.
Pros and Cons of Investing in Real Estate Without Buying Physical Real Estate
Several pros and cons are associated with each passive real estate investing strategy. The primary advantage of passive investing is also the main drawback, which is that those who passively invest in real estate have very little control over investment decisions.
Each of these investment vehicles relies on a sponsor or other entity being capable of executing the business plan as pitched to investors. Those who want to have a more significant say in how a property is redeveloped or managed will want to consider active investment strategies instead.
Pros of Investing in Real Estate Without Buying Property
Real estate diversification: Passively investing in real estate allows people to invest smaller dollar amounts in more projects. They can invest in various product types, development strategies (e.g., stabilized vs. value-add investments), and in multiple geographies. This helps to mitigate the risk associated with investing in and owning a single property outright.
Investment portfolio diversification: Investing in real estate without buying property is a great way for someone to diversify their investment portfolio away from more traditional stocks and bonds. Having a diversified portfolio is essential for those looking to mitigate risk.
Cash flow: Passive real estate investments are an excellent way for individuals to earn monthly cash flow distributions without having to lift a finger.
Tax benefits: Real estate is a notoriously tax-advantaged industry. Those who passively invest in real estate can still take advantage of these benefits, including depreciation and deferral of capital gains taxes.
Little experience required: Passive real estate investing is great for those who do not have the time, interest, or expertise to own investment property successfully. All of the strategies featured here allow people to invest alongside professional ownership groups who manage the properties on investors’ behalf.
How Much Money Do You Need to Invest in Real Estate Without Buying a Property?
Commercial real estate has notoriously high barriers to entry. However, the advent of tokenized real estate, real estate crowdfunding and other platforms has made it easier for people to invest in smaller denominations. Some real estate platforms like HoneyBricks allow people to invest with as little as $100. At the opposite end of the spectrum, some syndications require people to invest at least $50,000 per investment.
Moreover, some deals are only open to accredited investors. To qualify as an accredited investor, someone must earn at least $200,000 annually (or $300,000 with a spouse) or have a net worth of at least $1 million. Be sure to understand whether you qualify as an accredited investor before pursuing deals.
Things to Consider Before Investing in Real Estate Without Buying Property
Given the variety of investment strategies featured here, how does someone decide where to invest? A lot of that comes down to an individual’s own personal circumstances. Before investing, consider the following:
How much time do you have? If you have limited time to oversee your real estate portfolio, you’ll want to invest passively in partnership with a qualified sponsor.
How much risk are you willing to accept? As noted above, some strategies are inherently riskier than other real estate investments. Depending on your investment goals and time horizon, you might be willing to accept more or less risk. For example, someone in retirement may be more risk averse and opt to invest in REITs than someone who’s still early in their career and has time to recover financially if a deal goes sideways. Those with moderate risk tolerance should consider tokenized real estate or syndications. As always, it is vital to have a balanced portfolio to mitigate the risk associated with various asset classes.
What degree of liquidity do you need to maintain? Let’s say someone has only $50,000 to invest. They’re also considering buying a home in the next 3-5 years. In situations like these, the investor may look to preserve their liquidity. They would want to consider REITs, mutual funds, and tokenized real estate. Those who have more liquidity or more patient capital may want to invest in deals with more extended hold periods.
Where are we in the real estate market cycle? Most real estate cycles last about ten years. Real estate industry experts agree that a real estate market correction is likely in 2022-2023. This could influence how someone decides to invest in real estate. For example, REIT values may tumble in the short term. Real estate funds may struggle to acquire assets, and therefore, deploy investors’ capital. Those who fear a recession will want to take steps to mitigate risk, such as investing in multiple properties instead of a single asset.
Start Investing in Real Estate
So, what is the best way to invest in real estate without buying property?
Well, there are advantages to each of the strategies. In fact, many investors utilize several of these vehicles simultaneously. At the end of the day, the goal remains the same: to generate sufficient passive income to help individuals build generational wealth.
Are you ready to invest in professionally managed, high-quality tokenized commercial real estate?
The best way to get started on that path is to begin investing today—one way or another. Create your HoneyBricks account to explore available investment offers and start building your wealth.