How do many wealthy people get that way? They invest in real estate. It is a proven way to build wealth. 90% of millionaires became so through owning real estate.
So said famous industrialist (and billionaire) Andrew Carnegie. Yet only 15% of Americans invest in real estate, according to a 2017 study.
As a real estate investor myself, I can attest to its wealth-building power. Whenever the subject comes up in conversation, almost everyone says they have thought about investing in real estate. So why is it less than 1 in 7 have done it?
Many people think it is too complicated, or would require too much time or money to get started. And maybe that was true 20 years ago.
But today, there are so many different ways to invest in real estate (without even buying property) that there is room for almost everyone to be a real estate investor in some way.
Can You Invest in Real Estate Without Buying Property?
When most people think of investing in real estate, they think of the mom-and-pop investor who owns several rental houses and spends their evenings and weekends fixing them up and dealing with tenant issues.
While this is certainly a viable and profitable strategy, there are many other avenues to invest in real estate. One of the biggest hang-ups people encounter when considering investing is the process of buying a property – they don't have enough money, or there's too much risk, or they don't know what they're doing.
To those people I say – change the definition! There are many ways to invest in real estate without buying a property at all.
7 Ways to Invest in Real Estate Without Owning Rental Property
Here are some of the best ways to invest in real estate today without having to buy a property:
#1 – Invest in REITs
A Real Estate Investment Trust (or REIT) is a company that owns and operates real estate. You can buy shares in a REIT and thereby own a small part of the company that owns the real estate.
It can be a great way to learn how to invest in real estate with little money. You can buy a share of a REIT for $10-100, compared to a down-payment of $10,000 or more for a rental property.
Your money is pooled with other investors' money and is used to purchase real estate properties. The REIT manages the property, and you get the benefits of the cash flow and appreciation generated by the physical property owned by the REIT.
REITs come in many flavors, and often they specialize in a specific type of real estate such as:
- multifamily housing
- office buildings
If you're interested in a specific asset class, there is almost certainly a REIT out there for it.
And if you're interested in getting general real estate exposure in your portfolio, there are even index funds that track the overall real estate market (similar to an S&P 500 index fund). One example is VGSIX – Vanguard's Real Estate Index Fund.
#2 – Real Estate Crowdfunding
The JOBS Act of 2012 opened the door for many small businesses (including real estate companies) to raise money through public crowdfunding.
Private equity real estate investing used to belong solely to the super-rich and well-connected. But crowdfunding has allowed average investors to participate in real estate in a way that was impossible before.
Crowdfunding is similar to a REIT. Fund managers pool your money to buy either a single property or multiple properties. The profits from renovating, operating and eventually selling the real estate get divided among the investors. There are usually two pieces – a dividend (paid out quarterly or annually from operating cash flow), and equity growth (from appreciation, reflected in the share price).
There are dozens of real estate crowdfunding platforms, but two that focus on helping unaccredited (i.e., not super-wealthy) investors get involved in real estate are Fundrise and DiversyFund.
Both allow you to get started with as little as $500 and invest your money in a diverse portfolio of real estate properties.
- Fundrise allows you to choose your risk tolerance and balance toward cash flow or appreciation. Since 2014, Fundrise has produced an annualized return of 10.8%.
- DiversyFund is a newer player in the crowdfunding game. They started in 2017. But they have produced an impressive 17.7% annualized return from their strategy of investing exclusively in value-add multifamily housing.
#3 – Hard Money Lending
I've done a lot of different things in real estate investing, but one of my favorites is being a hard money lender. If you have the cash, you can “become the bank” and lend money to house flippers or landlords who need to do serious work to a property before they can get a typical bank loan.
A hard money loan is generally a short term (one year or less) loan issued on a property during the renovation phase.
For example, I loaned money to an investor who bought a house intending to do a complete renovation and then reselling the property. I am earning 13% interest plus 2 points (a point is an up-front fee of 1% of the value of the loan). I loaned a total of 75% of the after repaired value (ARV), and the real estate itself secures it.
By using conservative numbers and using the physical real estate as collateral, you reduce your risk. I personally only like to lend on properties I wouldn't mind owning myself if worst came to worst and I had to foreclose.
One way to participate in hard money loans online is through a platform called Groundfloor. Groundfloor creates the loans to the real estate flippers, and you can invest as little as $10 to own a piece of the loan and collect the interest.
You won't earn as much as you could by building relationships with flippers and landlords yourselves, but in my personal experience, I was able to make about 12% per year with Groundfloor. Most loans on the platform are in the 7-14% interest range.
#4 – Become a “Money Partner”
Many people want to get into real estate investing, but they don't have the cash to do it by themselves. Even if a bank loans you 80%, coming up with the other 20% plus any budgeted renovations can easily set you back $20,000 – $50,000.
Similar to hard money lending, becoming a money partner means you are bringing the cash to the table, and the other party is bringing the deal (and usually managing the renovation or operation of the property). But instead of offering them a loan at a set interest rate, you are becoming an equity partner with them and will make a certain percentage of the total profit at the end of the day.
For example, maybe a flipper is getting a hard money loan to cover 70% of his total costs of purchase and renovation but still needs the other 30%. That's where you come in. In exchange for providing the remaining 30% of funds, you will get a certain percentage of the profits when the house is renovated and sold (it's common to split profit 50/50).
The structure of these types of partnerships can be with almost any terms imaginable. In my experience, they work best with someone you already know and trust.
But even still, the terms of the partnership should be written down and agreed to beforehand, and preferably reviewed by an attorney. Many things can go wrong in a deal, and you want to make sure your hard-earned money is protected as best as it can be.
Other Ways to Earn Money in Real Estate Without Buying Property
While “investing in real estate” sounds passive, owning rental properties isn't necessarily all that passive (and flipping is definitely not passive).
The ideas above are mostly passive ways to invest in real estate. I wanted to give a few other ideas to make money in real estate through less passive means, while still being able to get involved without much money and without having to buy a property.
#5 – Wholesaling
Wholesaling is how we got our start in real estate investing and built up our cash reserves to purchase more rental properties.
If you're not familiar with it, the basic premise is you go out and hustle looking for good deals on properties, put them under contract, then sell that contract to another investor for a fee. We were able to make an average profit of around $10,000 per property this way, without ever owning it!
To be clear, wholesaling is far from passive. You have to be willing to put in the work to find truly great deals. These usually come from people in financial or another type of distress.
Either the house itself is in distress – it needs too much work to sell through normal channels – or something is going on in the owner's life that they need to sell quickly for cash. Perhaps they are facing foreclosure, or are behind on their taxes.
#6 – Get a Real Estate License
When we first got started in real estate investing, my wife got her real estate license so we could save on some of the transaction costs.
However, an unexpected benefit has been the extra cash we've been able to make from her helping friends, family, and referrals to buy or sell their home. It's turned out to be something she truly enjoys doing, and it's a very part-time way for her to make an extra $10-20,000 per year.
We don't do any marketing at all, but just by already being involved in real estate and making relationships, she picks up a few clients every year.
Most people will tell you you will never make any money as a part-time real estate agent, but that hasn't been true in our experience. I think if you have an interest in real estate already, getting your license can be a great way to earn some extra money. And most of the work is on nights and weekends, so even if you have a day job, it can be done.
If you do decide to go this route, it does cost a decent amount of money to maintain your license. It varies by state, but for my wife, it's around $3,000 per year.
#7 – Provide a Freelance Real Estate Service
If you are interested in the real estate industry but aren't quite ready to buy property, you can learn a lot by providing a service to real estate agents or investors.
Freelancing is an easy way to earn extra money, and in my experience, anyone can learn how to make $200 in a day using skills they already have.
There is an entire industry built around financial, marketing, software, and other services provided expressly to those in real estate. Almost any freelance service you can think of can be targeted toward the real estate niche.
Here are a few examples of freelance services you could provide:
- Transaction coordinator – Once a deal is locked up between a buyer and seller, real estate agents often pay someone else to schedule the closing process and make sure all the “i”s are dotted and “t”s crossed on paperwork. You could quickly learn how to make $200-300 per deal for coordinating and guiding it toward a closing.
- Bookkeeper – Just like any other industry, real estate investors and agents need to keep good financial records. If you have a keen eye for detail and love for numbers, you can learn how to become a bookkeeper for the real estate niche. There are some industry-specific things you can learn (such as how to read and properly classify a property closing statement) that will set you apart from any old bookkeeper off the street.
- Marketing/social media manager – Real estate is all about generating leads. If you have a marketing background or a desire to learn, you could run Facebook ads, mailing campaigns, or social media profiles for agents and investors to help generate leads.
Invest in Real Estate Without the Hassle
I hope this article inspired many of the armchair real estate investors out there to take action. As you can see, you don't have to be a landlord to make money in real estate.
Whether passively investing through a REIT or crowdfunded syndication, or starting a side hustle catering to the real estate industry to save up investment capital, there are so many different ways to participate in the most significant wealth generator of all time.