Most of us think that investing in real estate means buying property and renting it out to someone else. However, this comes with its own headaches, such as maintenance costs, unruly tenants, or tenants that do not pay on time. This will mean a change in your everyday lifestyle, and naturally, most will not want to sacrifice that. But this doesn’t mean that you can’t invest in real estates. Here are some other ways you can do so without buying a property.
Real Estate Investment Trusts (REITs)
According to Investopedia, REITs are companies that own, operate, or finance income-producing real estate. There are certain guidelines that a company must meet to qualify as a REIT:
- Invest at least 75% of its total assets in real estate, cash or U.S. Treasuries
- Receive at minimum 75% of its gross income from rents from real property, interest on mortgages financing real property or from sales of real estate
- Pay a minimum of 90% percent of its taxable income in the form of shareholder dividends each year
- Be an entity that is taxable as a corporation
- Be managed by a board of directors or trustees
- Have a minimum of 100 shareholders
- Have no more than 50% of its shares held by five or fewer individuals
There are three main groups of REITs. The vast majority of REITs that you will find out there are Equity REITs. These REITs “invest in and own income-producing real estate properties and give investors the opportunity to invest in these portfolios.” Mortgage REITs invest and own property mortgages, while Hybrid REITs invest both in properties and mortgages
It may be hard to determine which one is best for you, but according to an article published by CNBC last year in May, 34 mortgage REITs were averaging 9.87 yields in comparison to equity REITs, which were yielding 4.01 percent at the end of the first quarter. Nareit, The National Association of Real Estate Investment Trusts, currently estimate that 2018 will be similar to 2017, though they do advise caution, which is detailed in this Q/A with Bose George who has 21 years of experience in the industry.
Establishing a Real Estate Partnership
If the landlord work does not meet your fancy, you could consider creating a partnership with other investors and real estate professionals. There are two ways you can consider conducting business. You can either do it as a partnership or a limited liability corporation. According to “3 Easy Ways to Invest in Real Estate,” the segment of this partnership that conducts “business would purchase real estate and employ a property manager to oversee daily operations.”
By selecting this method, you can avoid the work that comes with being a landlord. However, if you do intend to create a partnership, it is strongly advised that you do so with proper legal guidance. Moreover, you should make sure that everyone’s role is clearly defined from the outset. In doing so, you can avoid getting too far down the road and realizing that no one knows what responsibilities belong to who.