When it comes to real estate, there are a few go-to routes that many investors are typically drawn to.
Flipping homes for resale is one. Obtaining and managing a rental property is another, whether renting to long-term residents with leases or listing the property on vacation rental sites.
There are, however, alternative real estate investing strategies if neither of those strike your fancy. All investors should know what their options are so they can choose an investment option that works best for them. Let’s take a look at seven different options for real estate investors.
1. Real Estate Investment Trusts (REITs)
Real estate investment trusts (REITs) are real estate holding companies that are run by operators or investors. They invest in specific asset classes, often within a set, concentrated location.
The REIT will purchase assets like apartment buildings, retail or office spaces, hotels, cell towers, and data centers. Any real estate that can be leased or rented for a profit is fair game, and it uses the buying power of multiple investors to purchase properties singular investors alone likely couldn’t have obtained.
Investors will receive profit in the form of dividends from the rent or lease money, and REITs must pay out 90% of their taxable income in dividends.
Other pros of REITs include:
- Obtain profit on properties you likely wouldn’t have been able to acquire alone.
- Have a third party manage the hands-on work of real estate investing.
- They can be safer investments than rental properties, which can be damaged.
- Cash flow reserved for growth is tax-deferred.
While you don’t have control over a specific property or even how funds are allocated, if you’re comfortable letting someone else take the reins, this can be an easy road to profit.
2. Mobile Homes
Mobile homes may not be the first thing that comes to mind when considering your next venture, but this can be a highly profitable alternative real estate investment strategy.
Specifically, you can invest in mobile home parks. While many investors are offloading apartment assets for a number of reasons (including that many are acquired with very little margin of safety), manufactured homes are another story.
The most significant pros of investing in mobile home parks include:
- More buyers (including REITs) are interested in this asset class that are already stabilized and upgraded, so you can acquire and upgrade a struggling mom-and-pop park for significant profit.
- They’re often steady during economic downturns.
- There’s a shrinking supply despite increasing demand.
- Mobile homes have particularly sticky tenant bases.
- Overall maintenance expenses are low.
3. Real Estate Partnerships
Real estate partnerships come in all shapes and sizes. Or, more precisely, they commonly come in three different types:
- Active partners, in which both parties “hustle” on the project.
- Loan-based money partners, where you bring the deal and the work, and a partner brings the funds.
- Equity-based money partners, where you provide funding in exchange for equity in the deal.
You can, therefore, find a partnership that works well for you.
If you want to find an active partner who contributes financially and in hard work alongside you, great! In some cases, two brains are better than one, and you can leverage each other’s strengths to acquire, modify, manage, and/or sell properties.
In other cases, it works better if one partner brings funds and the other does the actual work involved with managing the deal. While the funding partner may be involved in key decisions, sometimes they’re almost entirely hands-off.
Find a partnership that works for you and your needs, and go from there—you’ll likely be able to invest in properties you wouldn’t have been able to on your own.
4. Hard Money Loans
Hard money loans use real estate assets (like existing owned properties) as collateral instead of relying on your financial history. In many cases, the property you’re buying can even be used as collateral, though retirement accounts or other properties may be used.
Hard money loans allow borrowers to acquire funding without going through extensive approval processes from traditional lenders, and they often offer more flexible terms.
As a real estate investor, you can offer hard money loans to other investors instead of purchasing properties yourself.
Becoming a hard money loan investor does come with some downsides. It’s typically only a good option for wealthy investors, and you need to have a strong understanding (and intuition) when it comes to spotting risky opportunities—including risky borrowers. There’s also more risk involved, and you want to be prepared for potential depreciation of the asset.
There are pros, however, including:
- You can invest without managing or purchasing a property yourself.
- It can offer higher returns than fixed-income investments.
- There’s always demand for private loan options in real estate.
- You’re in control over the loan, including who you approve and on what terms.
- Successful lenders typically enjoy returns between 8% to 15%.
5. Private Money Lending
Private money lending involves a private lender loaning money to a borrower outside traditional financial institutions. They’re often less regulated than traditional loans, making them more flexible, though you do have to follow state usury laws that limit how much interest you can charge.
Private money lending and hard money lending is similar. The key differences, however, is that hard money loans focus on the hard asset of the real estate, while private money lenders look at the property and the borrower. As a result, the pros and cons of private money lending are similar to hard money lending, as we just discussed.
There’s risk involved for you as the lender, so you need to be extraordinarily careful with who and what you invest in. There are also some limitations, based on state laws, dictating how much interest you can charge or how many loans you can hold at once as a lender.
You’ll also be tying up your own funds; you can’t just sell the loan the way you would a property, so that dispensed capital will be allocated for the duration of the loan.
That said, consider these pros:
- You get a more hands-off alternative real estate investment that doesn’t require you to acquire properties, deal with tenants, or worry about maintenance.
- There aren’t direct risks of property ownership, like dealing with flooding or a tenant trashing a home; you have a set investment and a set profit, as long as the borrower doesn’t default on the loan.
- You can charge slightly more than standard interest rates, with the standard being around 15% to 20%.
6. Real Estate Crowdfunding
Real estate crowdfunding involves a group of people who each contribute a small amount of funds to raise significant funds that can be used to acquire properties or real estate projects.
This is still a relatively new concept for real estate investors, and as with REITs, it allows for passive investing with a number of different opportunities and in different niches. Someone else manages the investments and purchase decisions—you just need to choose which group to invest in.
There are differences between real estate crowdfunding and REITs, which include:
- REITs allow you to purchase shares of commercial properties, and income is distributed as dividends to shareholders. These shares can be purchased on major exchanges or through exchange-traded funds (ETFs).
- Crowdfunding allows entrepreneurs to raise capital for projects among a group of individuals. You can contribute for equity, or on a debt-based agreement where you’ll receive funds back over time as if you were a lender. You can join real estate crowdfunding platforms to find opportunities.
The downsides to real estate crowdfunding include an overall lack of control, which some investors don’t want. This also isn’t an investment that’s easily sold, so you’re tying up your capital; this is particularly significant because there are limitations on how much you can invest unless you’re accredited, so you need to choose wisely.
There are also lower returns with this form of investing than other options, especially after the crowdfunding platforms take their share of fees.
That said, there are also pros to consider:
- There’s a low buy-in, making it a great option for people without as much in upfront funds but who still want to invest.
- It’s a great way to diversify your portfolio.
- You can invest without having to be hands-on in property acquisition, management, or selling.
- There’s increased availability.
Keep in mind that you can invest in real estate crowdfunding opportunities, but you can also leverage them to help you fund your own projects, too.
7. Real Estate Syndication
Real estate syndication allows property investors and developers to pool resources so they can purchase and manage different real estate assets.
Real estate syndicators— who are also called sponsors—lead acquisition and management of assets. They purchase and renovate properties, as well as manage potential tenants. In other words, they deal with the actual property and rental management, though they may also invest finances in syndication for a higher percentage of profits.
Real estate investors will invest capital in the property syndication, often as passive investors, in exchange for a share of profits and/or ownership. They must meet specific eligibility requirements as detailed in the JOBS Act of 2012.
As a syndication investor, you do have less control over your investment assets—a common downside to the alternate investments listed here.
There’s also a lack of liquidity, once again, because the capital may be tied up for an average of three to 10 years. Since there may be fewer returns because profits are shared between investors and sponsors, this is a long road to significant profit.
Finally, the minimum requirements to be an accredited or sophisticated investor must be met.
That said, there are pros to consider:
- Earn passive investment income without additional risks of being in a limited partnership.
- You can participate in more lucrative investment opportunities with more syndicators involved.
- Bonus depreciation offers strong tax benefits.
- You can join a group of investors and developers with shared investment goals.
Final Thoughts
If you want to invest in real estate but aren’t entirely sure about flipping or renting out homes, consider these alternative real estate investment strategies. They allow you to leverage your passion and knowledge for real estate without having to be a hands-on property manager. And while some assume risk in new ways—like if a borrower struggles to pay back their loan—they also remove the risk and hassle of dealing with renovations, property acquisitions, tenants, and selling yourself.
There are plenty of great real estate investment strategies out there. You just need to choose which one is right for you.
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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.
