Owning an investment property has traditionally been a very popular way to earn income through real estate. If you ask the right questions, do your research, and buy right – you have the potential to make a healthy return.
But buying an investment property isn’t for everyone. For some, it’s a matter of not having enough money for a down payment, for others it’s the lack of time and expertise to manage a property.
Luckily though, there are other avenues to invest in real estate beyond purchasing an investment property. Below we’ve outlined three of the most popular alternative ways to earn consistent residual income by investing in real estate.
In the 1960s Congress passed a law creating Real Estate Investment Trusts (REITs), giving average individuals the opportunity to invest in income-producing commercial real estate. Today, an estimated 70 million Americans invest in REITs. Due to special tax status, REITs must follow strict compliance rules and thus carry a certain quality standard.
The two primary types of public REITs are traded and non-traded. Traded REITs are offered openly on an exchange, giving investors liquidity. However this liquidity is likely to be priced into the value of the shares, resulting in a “liquidity premium”, or lower relative returns for the same underlying assets. Traded REITs also tend to be correlated to broader market volatility, meaning the value may fluctuate depending on how the stock market is doing.
Non-traded REITs, on the other hand, have become more popular because of their perceived consistent double-digit dividends. However, non-traded REITs have recently come under heavy scrutiny because of the large upfront fees commonly charged to investors.
New Technology Platforms
In the past few years, new platforms have emerged that use technology to make real estate investment more efficient, resulting in lower fees, higher returns, and increased transparency. As the broader financial technology (FinTech) industry grows, more and more investors are moving to online platforms that give them more control over their money and take advantage of the efficiencies from transacting online.
These companies aim to offer the benefits of public markets, but with lower fees that can help investors earn better returns. Fundrise, a pioneer in the space, has leveraged new regulations and technology to offer the first ever low-fee, diversified commercial real estate investment available directly online to anyone in the United States.*
In 2015, Fundrise investors earned an average annual return of approximately 13% in 2015 - more than 8.5x the S&P!*
A private equity (PE) fund is a collective investment fund that pools many investors’ funds to invest in real estate. In real estate, private equity funds acquire properties and actively manage them to increase profits over a preset holding period, typically 10 years. The typical fee structure of a private equity fund is a 2% annual management fee, and 20% of any profits earned, commonly referred to as the “two and twenty” model.
Real estate investing is no longer limited to just buying an investment property. There are many different options which can be customized depending on your investment preferences. Regardless of which approach you pursue to invest in real estate, take your time to figure out which avenue makes the most sense for you and your financial goals.