Although many people outside of the real estate world are unaware of it, there are many ways that someone can invest in real estate without taking on all of the costs, risks, and headaches of property ownership. While there some substantial benefits that come with traditional fee-simple ownership, such as long-term appreciation and the absolute right to alter the property, however, the owner sees fit, there are also considerable drawbacks. And the biggest of those is the often-huge sums of money required to even make a down payment in today’s high-priced housing market.
In this article, we’ll take a look at some of the ways that small investors or those new to the real estate industry can get their feet wet in real estate without taking the head-first plunge of purchasing a property outright.
Real Estate Investment Trusts
Real estate investment trusts, also known as REITs, have been around since the 1960s. They are similar to mutual funds, and they allow a way for smaller investors to buy into big-ticket real estate projects for relatively tiny amounts of capital. Like any other kind of equity investment, REITs can run the gamut, from high quality and low risk to high risk with little chance of solid returns. For this reason, even investors who don’t have a lot of capital to invest must take care to perform due diligence and understand the workings of any REIT into which they buy. The downside is that many of these operations are extremely complex and require a solid understanding of the real estate industry to accurately assess.
Hard Money Lending
Most banks and other major lending institutions have hard rules about who they lend to, how much they lend and how much money they require as a down payment. While the largest real estate developers often have access to bridge financing and other short-term credit vehicles, many smaller real estate developers and home flippers do not. This is where hard money lenders come into play.
For the fix-and-flipper or the landlord looking to make an improvement to a property that they have not yet bought to put it in a higher rental bracket, the 20 to 30 percent down that a bank may require to underwrite the loan may be outside of their budget. As a hard money lender, you may be able to cover the shortfall while negotiating a substantial service fee and an interest rate far higher than prevailing mortgage rates.