How to get in on the real estate boom without actually buying a house

According to the Federal Housing Financing Agency, home prices are indeed on the up, with home prices up more than 18% year over year in the third quarter. And some analysts expect it to continue rising significantly into 2022.

But those who have been excluded from buying a house do not have to do without the rapid increase in the value of real estate.

Investing in real estate has long been the realm of “accredited investors,” a category of typically high-net-worth investors with access to high-risk (and potentially high-return) investments such as private equity real estate funds, hard cash loans, or real estate property syndication, where a select group of investors own their property Pooling money to buy real estate. But investment products like mutual funds and ETFs tied to real estate and online crowdfunding platforms are giving more people access to real estate investing.

“There are a lot of people who feel left out of the home market right now,” said Ben Miller, co-founder and CEO of Fundrise, an online real estate investment platform. “Investing in real estate is a way for them to understand real estate.”

While other alternative assets like cryptocurrencies can fluctuate wildly from day to day, real estate can be a reliable long-term growth investment and source of income, he added.

Here are some of the ways you can invest in real estate without buying a home or becoming a landlord.

Invest in REITs

Real Estate Investment Trusts own and invest in real estate. Investing in a REIT gives investors the opportunity to buy shares in commercial real estate portfolios and make money from income-generating properties without actually buying or managing the property.

Publicly traded REITs are available to investors directly or through mutual funds and ETFs. Some popular ones are Vanguard Real Estate ETF (VNQ (VNQ)) or iShares US Real Estate ETF (IYR (IYR)).Given the massive surge in property prices, REITs had a terrific year in 2021, with investor returns hitting a record high. According to an index by Nareit, a REIT industry group, cash flow from investing in equity REITs grew 40% year over year in the third quarter to a record high of $17.4 billion.

And there’s room for improvement in the real estate market, said Jim Sullivan, BTIG’s REIT analyst.

“We continue to see positive signs of economic recovery into 2022,” he said.

crowdfunding

Investors used to need tens of thousands of dollars to invest in real estate, but minimum amounts have dropped dramatically. Crowdfunding companies, which pool smaller amounts of money from a large group of investors to invest in real estate, have been able to reduce minimum investments to hundreds of dollars. There are even ways to invest with as little as $10.

For example, Fundrise offers an option that requires a minimum investment of $10. At this level, investment is made entirely in a flagship fund that includes properties across the country ranging from single family homes to distribution centers. The company charges an annual advisory fee of 0.15%, with its funds charging an additional annual asset management fee of 0.85%.

“Once you invest, you can see that you’ve invested in a real asset,” Miller said. “There is real value, not just market value or speculation about cryptocurrencies. A lot of people never thought they could own real estate.”

Another way to invest through crowdfunding is through real estate debt.

For a minimum investment of $5,000, RealtyMogul offers funds focused on growth or generating income from commercial real estate debt and equity in rental and other residential properties. Fees include a 0.5% annual service fee and a 1% annual asset management fee based on the REIT’s total equity value. Another company, Yieldstreet, offers an alternative investment fund, the Prism Fund, with access to investments previously only available to institutional investors. The fund consists of, among other things, real estate debt and investments as well as debt from the arts, marine and legal industries. The aim is to generate returns that can be paid out quarterly in cash or reinvested. The minimum investment is $500 and the fund charges an annual fee of 0.5% and a management fee of 1%.

Crowdfunding sites offer a way to earn decent returns in the real estate market, though probably not as much as buying real estate outright, said Blaine Thiederman, board-certified financial planner and founder of Progress Wealth Management.

“Will it get you the same returns that you could get if you went out and invested in your own real estate? Unlikely,” said Thiederman. “However, I’ve seen stock-like returns and occasionally better returns across each of these platforms.”

While their simplicity and cheap income streams are attractive from crowdfunding sites, investors need to be aware of the fees and the wait they have to wait to get their initial investment back.

Should You Invest?

Because real estate tends to both increase in value and generate income, it’s a great way to diversify your portfolio, said Marcus Blanchard, board-certified financial planner and founder of Focal Point Financial Planning.

“Stocks typically get most of their returns from price appreciation, and bonds typically get most of their returns from the interest payments that investors receive,” he said. “But real estate is right in the middle, where returns are more balanced between price appreciation and steady income.”

But there are some risks, including real estate market volatility and the quality of the property, Blanchard said. The larger REITs tend to have access to higher quality assets because of their size. Meanwhile, smaller crowdfunding firms are doing their due diligence but may still be investing in lower-quality properties, he said.

Most advisors recommend investing only a small portion of your total investment in real estate.

“I don’t typically recommend anyone investing more than 10% of their portfolio in real estate, whether it’s through a REIT, investing through an online platform like Fundrise, or in rental properties, because there’s just so much risk,” Thiederman said. “Investment strategies need to be profitable because who knows what will happen in the rest of our lives, but that doesn’t mean we should invest 50% of our retirement accounts in speculative condominium developments.”