The real estate market is a hot topic, and everyone is fighting for a piece of the pie. And while any investment would require hard work and resources, there are growing numbers of open and inexpensive ways to invest in real estate online for everyday consumers — particularly with the advent of real estate technology.
The following methods will allow you to take the first step to becoming a next real estate mogul, all from your laptop or smartphone’s comfort:
- REIT ETFs and mutual funds
- Property notes
- Investment in a company focused on real estate
- Crowdfunding for real estate
- Hard money loans
Let’s dive in more depth into every of those investment opportunities:
1. Invest in Real Estate Investment Trusts (REITs)
A property investment trust (REIT) is a company that buys, manages and sells real estate investment properties. Investors can buy a share of a REIT and get a portion of the income generated from the property portfolio.
For example, a REIT may consist of a group of shopping malls across the U.S., offering investors the opportunity to own a small piece of 20 or 30 separate shopping malls across the country without needing to control the property. Purchasing a REIT can be seen as close to buying stocks from companies holding, operating and leasing real estate assets. Most REITs concentrate on one form of property, e.g. retail, hotels or buildings for health care.
The process of buying a physical investment property can be lengthy and rigid — and it can take much longer to locate trustworthy tenants. REITs allow investors to own a share of an income-generating property without the hassle of handling tenants and coping with expensive upkeep of the land.
You can invest in a publicly traded REIT by buying shares through a broker. Brokerage fees are usually in place and vary depending on the brokerage. Investors may also purchase shares of an exchange-traded REIT fund or a pooled REIT fund. One share of a public REIT not listed on an exchange would usually range between $1,000 and $2,500 in size. Private REITs, which can usually be sold only to approved buyers, can vary between $1,000 and $25,000 in size. Accredited investors have a net profit of at least $1 million, or more than $200,000 per annum.
It’s important to remember that the United States Securities and Exchange Commission (SEC), owing to high fees and lack of transparency, has cautioned investors against buying non-traded REITs. It is safer to stick to buying publicly-traded REITs instead.
2. Investing in REIT ETFs & Mutual Funds
An exchange-traded fund, or ETF, is a collection of stocks or bonds within a single fund. So, instead of selecting one or two different REITs to invest in, you could put your cash into a REIT ETF instead. This will spread your investment across a portfolio of REITs, and reduce the risk of investing in a small range of markets.
Within one ETF, you can have a hotel-acquiring REIT, another that purchases apartment buildings, and a third that buys retail space. REIT ETFs offer large diversification for investors with low overall fees.
A mutual property fund is a hands-off way to invest in immobilities. You invest in a fund that focuses on real estate securities (usually stocks) and then reinvest any gains back into the fund as they do in any mutual fund. The fund manager will invest in a combination of REITs, real estate sales companies, real estate service providers and property management companies.
A joint real estate fund can consist of a portfolio of shares in several REITs and immovable companies. In comparison to owning physical real estate by itself, mutual real estate funds are fairly liquid and can usually be sold in one day or two.
Similar to any other public stock, investors can purchase shares in a REIT mutual fund or exchange-traded fund (ETF), as it is listed on major stock exchanges. It is advisable to speak with a broker, investment advisor or financial planner who can recommend appropriate investments when determining REIT investments.
3. Invest in Real Estate Notes
A note is a promise to pay. Whenever you borrow money, such as a mortgage, you make a note saying you’re going to pay back to the lender.
If the note “performs,” that means that the borrower is making regular payments to the loan. Then the buyer will buy the performing note and continue collecting the payments — effectively functioning as the bank — resulting in a steady stream of passive revenue.
As for every kind of investment in real estate, there are also risks involved. There is always the possibility, in particular, that the borrower will stop making payments and default on their loan. If this occurs, you will then need to take control of the property through foreclosure or sue the borrower as the note owner. To help avoid this from occurring, it is highly recommended to go over the valuation of the house, the financial history of the applicant, and the specifics of the loan agreement needs to be carefully investigated.
There are many places to buy online real estate notes, for example with BankProspector, Paperstac, and Loan MLS.
4. Real Estate Crowdfunding
Latest technology provides a multitude of new and creative resources to link potential real estate investors with opportunities for investment. One such atmosphere is created by crowdfunding sites. Read here our top-rated reviews of crowdfunding sites.
Real estate crowdfunding is a space for online investment that allows prospective real estate investors to bring funds into specific ventures. The platform ultimately links real estate developers to buyers, who then put their cash into the project — say, redeveloping an apartment complex. Upon completion of the project, which could be five to ten years, the investor gets their share of the income.
The biggest difference between using a crowdfunding platform on your investment travel versus traveling solo is that your investment is handled by a team of real estate professionals. This, of course, is also the greatest risk because you are completely reliant on the project developer to produce what they promised.
If you’re not an accredited investor but want to get interested in crowdfunding for real estate, companies like Fundrise, stREITwise, and RealtyMogul are a great place to start. The platform will have a portal for creating an account, selecting an investment in real estate, entering an investment number, and tracking your growth in investment. The platforms provide comprehensive insight into the historical growth performance of the property when deciding on which investments to pick. It is also important to remember that a crowdsourcing site’s return on investment is treated as ordinary profit.
5. Hard Money Loans
Lending capital to other real estate investors in the form of hard money loans is a way to get interested in the business while having the time to concentrate on other projects for the ready, eager and able investor who has ample amounts of cash on hand but isn’t looking for the hassle that a physical property will bring. This investment option, however, is risky and can rapidly turn south if due diligence is not in place.
As any lending entity, hard money loans are loaned at a fixed percentage of the interest rate for a given period of time. Hard-money loans are usually borrowed over a span of one to five years, with interest payments made within the first few months and a balloon payment made at the end of the term.
It is strongly advised to ensure that you have good equity in the contract, and not to loan more than 70 percent of the value of the land. It is also good practice that the creditor is allowed to have title insurance. In case you have to foreclose on the property, you will be protected by title insurance against any liens (unpaid debts) on the property.
This investment approach should be done only with people you trust to pay the agreed amount and guidance from counsel should be obtained as a means of financial due diligence. The biggest difference between a hard money loan and a conventional bank loan is that the value of the hard money loan is based solely on valuing the piece of real estate as opposed to how much equity or credit a borrower has.
Hard money loans are primarily used for fix-and-flip projects or when a real estate investor needs to take swift action to procure a hot property. Hard money loans (also known as an “angel investor”) can be a highly lucrative way to enter the market without hammering up or signing a deed.
To become an angel investor, you must first be an accredited investor. There are many angel funding groups that are provided through the Angel Capital Association, and several may encourage new angels to join as a guest so they can get a sense of the investor’s level of commitment. Most of these parties also have membership fees.
When determining which avenue to take when investing in online real estate, always consult with a real estate advisor and conduct thorough research on the fees, terms and timelines that will hold your funds in the investment.
Remember – if something seems too good to be true, it is probably. Be careful about companies that generate remarkably high returns, as these are usually the ones with the highest fees and the most stringent conditions. However, as long as you perform extensive analysis and due diligence, an incredibly lucrative way to earn passive income may be to invest in real estate online.