How to Invest in Commercial Real Estate Without Buying Property
See How REITs and Crowdfunding Stack Up Against Direct Real Estate Investments
Yes, it is possible to be a real estate investor without owning brick-and-mortar property. From established companies like real estate investment trusts to relatively new startups like crowdfunding platforms, alternative investment vehicles allow individuals to get in the real estate investment game without ever setting foot on the property.
Do the rewards of alternative investments outweigh the risks? Take a look at how these real estate investment opportunities stack up against owning physical property, and consider which investments make the most sense for your situation.
Try a Real Estate Investment Trust
One of the most popular ways to invest in real estate remotely is by purchasing shares in a real estate investment trust (REIT). Basically, a REIT is a company that owns, operates, or finances income-producing real estate. So instead of buying real estate directly, you're buying shares in companies that own real estate.
Here's how it works: A REIT leases property and collects rent from tenants, and then pays shareholders in the form of dividends. By law, REITs must pay out at least 90% of their taxable income to shareholders. In turn, you pay the tax on the dividends you receive.
This is not just an opportunity for investment titans. Though some REITs don't trade on national stock exchanges, the majority are publicly traded equity REITs. So if you have a brokerage account and some money to invest, you can buy shares in a REIT. To get started, search for REITs by company name or by sector .
Consider Real Estate Crowdfunding
Another viable alternative to owning property outright is investing in real estate via crowdfunding. Fueled by the JOBS Act of 2012, real estate crowdfunding allows investors to select individual projects to fund, and thus build their own customized investment portfolio. Through platforms like Fundrise , Crowdstreet , Small Change , and many others, you can browse lists of curated investment opportunities and choose which properties and projects merit your investing dollars.
Similar to REITs, real estate crowdfunding platforms allow you to invest in commercial or residential real estate and receive cash flow distributions in return. Unlike REITs, which enable you to invest in a portfolio of properties, crowdfunding platforms allow you to invest in individual properties.
Compare Direct and Indirect Real Estate Investments
REITs and crowdfunding can be highly rewarding, but as with any investment, there are risks. Here are some of the key issues to consider when comparing property ownership with indirect real estate investment opportunities:
Capital vs. leverage: It takes a lot of capital to buy property directly—typically 20% of the property's value—but you can buy a REIT share for $10 or less. On platforms like Fundrise and Small Change, you only need $500 to start investing.
Conversely, direct investments let you use a higher level of debt financing, allowing you to borrow up to 80% of the property's value and then reap the gains of the entire asset as it appreciates in value.
Effort vs. control: REITs and crowdfunding require much less effort than direct investing, as management of the properties and finances is outsourced. By investing indirectly, you don't have to deal with common landlord hassles like finding tenants, collecting rent, and maintaining the property. The flip side, of course, is that you have less direct exposure to and control over your investments because you don't own the assets outright.
Dividends vs. predictability: Dividends from indirect investments tend to be lower than those generated by individual property ownership. After all, REITs have to cover the costs of corporate overhead, and they also need to pay a level of dividends that will be sustainable year after year. The trade-off, though, is that REITs and crowdfunding can be a much more predictable investment, generating consistent quarterly cash flow.
In the end, indirect investments allow you to secure a piece of the real estate investment pie without having to buy or manage physical properties. Just be sure to weigh the risks and rewards of each opportunity to determine which investments are right for you.