Investing in real estate is a safe bet for people looking to stabilize and grow their wealth. While property ownership is a traditional and popular approach in this regard, there are various other ways to generate profit from real estate. Several avenues, including passive real estate investing or digital real estate investments, help people earn from properties without owning them. But, one must note that such options cater to different risk appetites and investment goals.
1. Real estate investment trusts (REITs)
People seeking various passive real estate investing alternatives can look into REITs as a viable solution for their needs. A REIT is a property investment company that owns and operates income-generating real estate assets across various sectors. When a person invests in a REIT, they get the opportunity to earn dividends from these assets.
REITs are of multiple types, which can be classified either based on their investment focus or trading status. When the trading status is considered, REITs fall into three categories- private REITs, public non-traded REITs, and publicly traded REITs. Based on their investment focus, REITs can be classified into mortgage REITs, equity REITs, and hybrid REITs.
- Private REITs – The most exclusive investment option on this list. These investment trusts are neither registered with the Securities and Exchange Commission (SEC) nor publicly tradeable. These are typically available only to certain institutional investors.
- Publicly traded REITs – These REITs feature on major stock exchanges. They can be purchased or sold like normal stocks by individual investors. An advantage of these REITs, when compared to their alternatives, is that they come with high liquidity and transparency.
- Public non-traded REITs – These REITs are not listed on public exchanges but are registered with the SEC. While they are less liquid than publicly traded REITs, they might sometimes offer higher returns than most of them.
- Mortgage REITs – This option, also known as mREITs, invests in mortgages/mortgage-backed securities on behalf of investors. Any passive real estate investing income earned is from the interest.
- Equity REITs – These REITs directly invest in properties and possess full ownership of the same. The income generated for investors is primarily through rent.
- Hybrid REITs – These investment trusts combine the best of both mortgage and equity options and make money for investors through rent and interest earned.
2. Real estate limited partnerships (RELPs)
This investment concept shares certain similarities with traditional REITs. Here, a group of investors pool their money into buying, leasing, or developing real estate assets. This investment option falls under the broad category of real estate investment groups (REIG). There are multiple ways in which RELPs work. An important operational structure is the general partner method, where the partner has unlimited liability and tends to be a corporation, a development firm, or a property manager. Partners take on various day-to-day responsibilities. In the limited partners method, investors are liable only up to their investment amount. The limited partners are usually hands-off investors who provide financing in exchange for a return.
The main benefit of a RELP is the high returns it offers to investors in exchange for the multiple high risks involved, making them ideal for seasoned investors seeking real estate syndication opportunities.
3. Real estate funds
Exchange Trade Funds (Real Estate ETFs) and real estate mutual funds are two popular kinds of funds through which people can invest in property without buying a piece of land or a house. Real estate funds are a strong investment option for investors who are interested in accessing the market but also need a diversified investment portfolio. REITs can handle this operation by holding mostly or exclusively real estate investments.
REITs share many similarities with ETFs and real estate mutual funds. For instance, The returns earned by investors are based on their respective real estate portfolios and their proportional ownership. The one aspect in which ETFs or real estate mutual funds hold an advantage over REITs is the broader mix of assets available to investors, which reduces risk exposure.
4. Real estate crowdfunding platforms
These platforms collect funds from multiple investors and put the money into large-scale real estate projects that are typically unaffordable for individual investors.
Those seeking crowdfunding solutions must start by investing a minimum specified amount. Some crowdfunding platforms also come with their own real estate investment apps for individuals to monitor the status of their money in real time. Such platforms generally focus on commercial as well as residential real estate. Through crowdfunding, investors can put their money into either a single real estate property or diverse portfolios. Individuals can explore these platforms as they allow them to invest with lower entry costs while providing access to high-value projects.
5. Stocks and bonds in real estate companies
The stock market indexes comprise several different construction and real estate companies, which are listed just like their alternatives in the public domain. Entities like real estate development companies provide opportunities for individual investors to take advantage of real estate growth without directly owning a property. Furthermore, an investor can purchase and sell the shares easily, offering liquidity similar to other stocks.
It is important to note that while each investment option offers its own advantages, it comes with several risks. So, investors should consider their risk tolerance, investment goals, and liquidity needs before putting their money in these alternative investment avenues.