Invest in Real Estate Without Buying Property: 12 Alternative Investment Strategies

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Real estate investing is an excellent way to make money.

The problem is that you need a good amount of money to become a real estate investor.

Or, at least, that’s what many people think.

You don’t need to own investment properties to make money with real estate.

You can start with a lot less money and risk using the 12 alternative ideas listed below.

12 Smart Ways To Invest in Real Estate Without Buying Property

#1. Subleasing

When you want to invest in real estate without the capital outlay required to purchase property, consider subleasing.

As a real estate investor, subleasing allows you to rent a property and then re-rent it to another party, typically at a higher rate, to generate rental income.

Here’s how it works:

1. Lease a property: Secure a lease agreement with a landlord for a desirable rental property.
2. Agreement check: Ensure you are allowed to sublease under your lease terms.
3. Sublease to tenants: Find tenants willing to rent from you, often at a higher price than your lease.

Subleasing can be part of a strategy that contributes to your net worth by creating income-producing real estate without owning it.

It’s important to know this method requires due diligence and an understanding of real estate trends to ensure profitability.

You should consult a legal professional before engaging in a sublease agreement, as you’ll want to protect your interests and ensure compliance with local laws.

#2. Crowdfunding

Crowdfunding presents a modern avenue to invest in properties without purchasing directly.

Because of this, it’s my favorite way to invest.

By pooling your capital with other investors, you have the opportunity to own property investments that were previously inaccessible to individual investors.

Here’s how crowdfunding works.

You contribute money to a crowdfunding platform, like Arrived, to purchase a residential property.

The platform will pool funds from numerous investors to fund the project.

If the total investment amount is $250,000 and you invest $2,500, you own a 1% share of the property.

You get 1% of the monthly rental income; when the property sells, you get 1% of the appreciation.

The more you invest, the larger your share of the income and profits.

Here are the biggest benefits of this type of real estate investment:

• Portfolio diversity: This method allows you to diversify your investment portfolio across different types of real estate properties or markets.
• Growth potential: Crowdfunding can provide access to high-growth real estate projects.
• Control: While you won’t have direct control over the property, you can choose the campaigns you invest in.

One final note with crowdfunding platforms: You must check if you qualify.

Some platforms are only open to accredited investors, which means there are financial thresholds you must meet.

#3. Partner with Investors

When you invest in real estate, you don’t always need to do it alone.

Partnering with other investors allows you to start investing in real estate without the hefty initial capital typically required to purchase a property.

By pooling your resources with others, you diversify your portfolio and share the risks and the rewards.

The biggest issue you face with partnering with someone else is being on the same page.

You must ensure both have similar short and long-term goals and an exit strategy.

For example, do you both want to purchase residential property to rent out, or do you want this, and your partner wants to invest in office buildings?

Or flipping houses may interest you while your partner wants to own a long-term investment.

The more agreement there is from the start, the more the partnership will be a much smoother and enjoyable experience for all parties.

• Read now: Learn the pros and cons of investing in real estate

#4. Become a Money Lender for Buyers

If you’re keen on real estate investment but want to sidestep the hassle of property management, consider becoming a money lender for buyers.

This is a way to get involved in real estate investing by loaning money directly to buyers or investors looking for funds to purchase properties.

As a private money lender, you’ll need to strike a balance between competitive interest rates to attract borrowers and rates high enough to reflect the risk you’re taking and to ensure a good return on your investment.

You step into the role traditionally held by banks, providing a mortgage to the buyer.

Pros:

• Steady income: Earn consistent interest payments.
• Collateralized loan: The real estate serves as collateral, securing your investment.

Cons:

• Risk involved: If the borrower defaults, you must manage the foreclosure process.
• Liquidity: The loan ties up your funds for its duration.

Carefully draft a contract outlining the loan’s terms, including the interest rate, repayment schedule, and non-payment consequences.

Due to the complexities involved, consider consulting with a legal professional with experience in real estate transactions.

#5. Loan Money to Flippers

When you’re keen to invest in real estate but not interested in holding property, one viable pathway is loaning money to flippers.

House flipping involves buying properties, making improvements, and selling them for a profit.

As an investor, you provide the necessary capital to fund these fix and flip projects through a loan, and in return, you gain interest income.

Simply find a flipper by connecting with real estate professionals looking for funding.

Then, agree on terms, including determining the interest rate and loan duration.

Benefits:

• Passive income: Your money works for you, accruing interest over the loan period.
• Short-term engagement: Loans to flippers are typically for 1 to 3 years, less than a standard mortgage.

#6. Offer Hard Money Loans

If you don’t want to invest in physical property, you can offer a hard money loan to investors.

A hard money loan is a type of short-term financing typically used in real estate transactions, where traditional lending institutions may be unwilling or unable to provide swift funding.

Unlike conventional loans based on the borrower’s creditworthiness and income, the underlying real estate asset secures hard money loans.

Private investors or lending companies, known as hard money lenders, issue these loans focusing on the property’s potential value and equity rather than the borrower’s financial history.

The approval process for hard money loans is generally faster, making them a viable option for real estate investors looking to secure quick funding for property acquisitions, renovations, or other time-sensitive ventures.

However, hard money loans often come with higher interest rates and shorter repayment terms than traditional mortgages, reflecting the increased risk taken on by the lenders.

#7. Wholesaling

In the real estate market, wholesaling is akin to a matchmaking service where you, as the investor, play a pivotal role in the distribution channel of properties.

It works if you’re looking for an underpriced investment property yet to hit the market.

Once you find a potential property, you enter into a contract with the seller, giving you the right to buy the property.

But instead of buying it yourself, you find an interested third party looking to invest in real estate.

The most significant benefits include minimal costs, as you aren’t buying the property, and quick turnover, allowing you to profit quickly.

The biggest downside is finding worthy properties.

This can be a large issue in a hot market.

#8. Real Estate Notes

Real estate investments can be a powerful way to diversify your portfolio, and one under-appreciated way to enter the market is through real estate notes.

Real estate notes are a form of mortgage.

When you invest in these, you’re purchasing the debt the property owner owes to the lender.

Here’s a quick breakdown of how it works:

• Purchasing: You buy the rights to receive mortgage payments.
• Revenue: The income comes through the monthly payments the borrower makes.

Real estate notes can be attractive because they offer regular monthly income and security since the property backs the note.

However, it’s essential to do your due diligence. Get familiar with the specifics of each note, including the value and condition of the property and the creditworthiness of the borrower.

#9. Tax Liens

Tax liens are placed on properties when the owners fail to pay their property taxes.

By purchasing a tax lien certificate, you step into the shoes of the local government to collect that outstanding tax debt, plus interest.

Local governments issue tax liens on properties with delinquent taxes.

The government will issue a lien against the property to collect the money and sell it at an auction.

Investors can purchase these liens online or in person at auctions.

Once you’ve acquired a lien, you hold the right to receive the tax payment plus interest, which can be a lucrative return.

You could earn a decent return depending on the state and local regulations.

If the homeowner does not pay the taxes, you can foreclose on the property and become the owner.

#10. Invest in a Real Estate Investment Trust

Real Estate Investment Trusts (REITs) offer you another way to invest in real estate without physically buying property.

They act like a mutual fund in many ways but are different in the eyes of the IRS.

A REIT is a company that owns, operates, or finances income-producing real estate, providing an investment experience similar to buying stocks.

Most REITs own commercial real estate like shopping malls, hotels, and other non-residential buildings.

In recent years, some real estate investment trusts have invested in single-family homes and apartment buildings.

To invest in these real estate investments, you open an account with a broker and buy and sell like a traditional mutual fund.

As an investor, you earn “a steady flow of income because they are required to pay out 90% of the income they generate”, according to Michael Hunsberger, ChFC®, CFP®, CCFC, owner of Next Mission Financial Planning, LLC.

#11. Invest in Real Estate Mutual Funds or ETFs

When you want to diversify your investment portfolio without the heavy lifting of owning property, real estate mutual funds and ETFs (Exchange-Traded Funds) can be wise choices.

These funds allow you to invest in the real estate sector, tapping into its potential for growth and income.

A real estate mutual fund pools your money with other investors to purchase a range of real estate assets.

Typically, a professional fund manager will decide about buying and selling within the fund’s portfolio, encompassing various properties and real estate debt.

On the other hand, real estate ETFs are similar but trade on the stock market, offering you the flexibility to buy and sell shares in the fund throughout the trading day.

There are many advantages for real estate investors to invest this way, including:

• Diversification: Spreading your investments across multiple real estate investments can help mitigate risk.
• Liquidity: Real estate funds and ETFs offer the added benefit of selling your shares quickly compared to the long process of selling real estate.
• Lower Investment Minimum: Both real estate funds and ETFs allow you to gain exposure to investment property without needing a large amount of capital.

For many people, this option is a great first step as these investments are “very easy to invest and liquidate, and you can find securities that are particular to a real estate class, such as residential, commercial or otherwise. There is also low barrier to entry as you are limited only by the price of the ETF”, says Ross Blount, CFP®, CRPC®, CEPA, owner of Springbok Wealth Partners.

#12. Invest in Real Estate Focused Company

Real estate funds aren’t your only option if you’re looking more toward the stock market.

Investing in real estate companies allows you to buy shares of real estate developers and homebuilders such as Toll Brothers (TIREX), Lennar, and D.R. Horton.

• Home Construction Companies: By investing in homebuilders, you’re indirectly investing in the real estate they develop. These companies range from those that manage large-scale projects to those that focus on custom home building.
• Real Estate Developers: These firms take on bigger projects, including commercial spaces, residential areas, and even entire neighborhoods. Your investment in these companies helps fund future development projects.

When investing in these companies, you buy into their real estate portfolio, which professionals manage.

This means you avoid the maintenance and management hassles associated with property ownership.

Frequently Asked Questions

Is becoming a property manager a good way to start real estate investing?

Becoming a property manager for someone else doesn’t offer you the same benefits as owning an investment property.

As a property manager, you’ll manage real estate but not enjoy the property’s long-term appreciation or rental income.

However, it’s a good way to understand how rental properties work and what to look out for when you start real estate investing.

Are there tax benefits to owning real estate?

When it comes to taxes and real estate, it’s a complicated topic.

There are different rules if you are an active investor versus a passive investor.

Because of this, you must speak with a CPA to understand how owning real estate will impact your taxable income and taxes overall.

What is the best way for new investors to start investing in real estate?

For those just starting, the easiest option is crowdfunding.

It takes away a lot of the risk and is simple to start.

A close second would be a real estate mutual fund or ETF.

As you learn more about this dynamic world, you can expand into other real estate investments, like offering hard money loans and eventually owning rental property.

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