How to Invest In Real Estate Without Being a Landlord
You can be a real estate investor without being a landlord. If you don’t have the time, capital, or both to own a rental house, there are several ways to invest in real estate and profit.
While you might have dreams of one day becoming a landlord and building your own real estate empire, these other real estate investments can help you earn passive income in the meantime and diversify your investments beyond the stock market.
With some of these suggestions, you don’t even have to physically own the real estate property to earn an income.
Flip Houses for Profit
When you still have the capital and time to buy “fixer uppers,” you can also consider house flipping. By buying a house for below market value, making any necessary repairs, and selling it for market value (or more) you make a profit.
And, because you only intend to own these properties for a short time period, you don’t need to find a tenant to pay the mortgage until you make a sale.
Of course, if a house doesn’t sell immediately or you decide you want to keep it until its market value appreciates more, you can easily turn your flip into a rental or even a “rent to own” property to earn steady passive income until the house is officially sold.
Pros: High profit potential because you own the entire house, no long-term commitment, and it can be turned into a rental property (if desired)
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Cons: Large upfront financial investment and time commitment, might not be able to sell for a profit
Be an Airbnb Host
If you have a second home or even a spare bedroom but don’t want a full-time tenant, you can also become an Airbnb host. You will still need to deal with people, but it’s not quite the same as having a renter live their full-time. In some cases, an Airbnb property can be even more lucrative because you can charge more per night for the place.
If you were to rent the property, you might only be able to charge $1,000 per month. By charging $100 per night to Airbnb travelers, you only need to rent the house at least 10 nights a month to earn the same amount. If you can rent it out for 11 nights or more, you earn more money!
Pros: More profit potential than a full-time rental property when area rents are low
Cons: Can be a full-time job and you still have to be a landlord and interact/clean up after travelers
Buy Raw Land
If you still want to own physical real estate but don’t want to deal with the headaches that come with rental properties and house flipping, you can also invest in raw land.
Here are a few advantages of investing in raw, undeveloped land:
- No building upkeep
- Lower property taxes
- Property is undeveloped and can be rezoned industrial, commercial, or residential
If you drive down the highway and see tracts of land with “For Sale” signs posted, that can be you selling undeveloped land one day.
Land investing is extremely flexible as you can sell tracts that are only one or two acres in size or 40+ acres.
As a beginner investor, when you have little capital to invest with, buying an undeveloped lot can be extremely affordable. If you can buy a lot at a discount or buy and hold until land prices begin to increase, you can sell the land to a developer, farmer, or neighbor for a profit.
Pros: No building upkeep, lower annual expenses, smaller initial investment
Cons: Might not be able to find small parcels in your price range, land might be undevelopable and worthless
Invest in a REIT Mutual Fund or ETF
If you invest with a robo-advisor, a portion of your portfolio is probably invested in a Real Estate Investment Trust (REIT) ETF. Even if you’re a DIY investor, you might hold one of the following REIT ETFs:
- Vanguard REIT ETF (VNQ)
- Schwab U.S. REIT ETF (SCHH)
- iShares Global REIT ETF (REET)
- SPDR Dow Jones REIT ETF (RWR)
With a REIT ETF, you can invest in a fund that focus on one specific type of property like:
- Residential (US or International)
- Apartment complexes
- International properties
- Specific states or regions (i.e. only California or only New England)
By buying an index REIT fund, you will own a mutual fund or ETF that owns a basket focused REITs so you have exposure to residential, commercial, and industrial investments all across the country (or world) so you’re not affected by any potential real estate market downturns in a particular region.
REIT funds have been around since the 1960s and average investors that don’t have the time, capital, or desire to be a landlord can still invest in real estate
While you can buy a REIT that only holds properties for a specific region or state, your risk level can also be a lot higher. You may decide to invest in focused REITs but you should also consider a REIT index fund too if you want instant diversification with your small investment.
Pros: Own real estate without the headaches of owning physical real estate, Invest in real estate properties across the globe, highly liquid
Cons: Lower potential yield than investing in physical real estate and real estate crowdfunding
Invest in Real Estate Crowdfunding
While there’s nothing wrong with the last suggestion of investing in a REIT fund, a similar alternative is peer-to-peer (P2P investing) real estate platforms. You can earn a higher yield because there are fewer operating expenses but require a long-term commitment and you might not be able to sell your entire position like a REIT mutual fund or ETF that are extremely liquid and can be easily sold to another investor.
P2P investing got its start about a decade ago, right before the Great Recession. In the years since, P2P investing has become a popular alternative for investors that want to earn a higher yield than bonds and money market account without the stock market volatility.
Because you lend directly to the borrower and are “the bank,” P2P loans can be riskier than a Certificate of Deposit (CD) or Money Market account, but you can usually expect an annual return of 8% on average. Considering most CDs and money market funds only earn 1.50% at best, you can earn 600% more by skipping the bank that may lend the money to the exact same borrower but keep most of the profit from the interest payments.
Some of the best P2P real estate platforms include:
These four recommendations are (as their name implies), real estate crowdfunding platforms. You are a direct investor in new construction and rehab projects that are normally sold in note sizes of $25 apiece to diversify your portfolio and limit your risk in case one project goes bust.
Something to keep in mind with P2P investing is that many platforms require you to be an accredited investor with high net worth. Because P2P investing is unconventional and riskier, they don’t want novice investors betting and losing their entire life savings in crowdfunded real estate.
If you don’t meet the accredited investor qualifications, you should look at Fundrise first because its open to the average investor and they only require a minimum initial investment of $500 (not $5,000 like the others).
Pros: Higher potential yield than traditional REIT funds
Cons: Less liquid than traditional REIT funds when you want to redeem your funds, potentially more risky than REITs and fixed income assets because you lend directly to the borrower with uninsured funds, some P2P brokerages require you to be an accredited investor and make a large initial investment.
If you’ve dismissed real estate investing becuase you thought you had to be a landlord, think again! Owning rental properties can be a great way to earn steady passive income for decades, but it can also be a lot of work. Whether you want to invest in physical real estate or only be a real estate investor through REITs, you can make money and diversify away from the stock market.
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