It’s no surprise that people are looking to capitalize on the real estate market without actually shelling out the cash necessary. After all, with the majority of U.S. markets seeing double-digit appreciation in the last year, buying property is more expensive than ever.
With the likelihood of increasing interest rates this year, it may become more expensive yet.
The trend to invest without "investing" is even making headlines. Earlier this month, CNN published a piece called, “How to get in on the real estate boom without buying a house.”
So, can you really invest in real estate without buying real estate? And if you can – is it even worth it?
The Two No-Buy Real Estate Investment Alternatives
When people talk about ways to invest in real estate that don’t involve buying properties, they’re usually talking about one of two methods: REIT investing or crowdfunding. In either method, your money only buys a share in a property investment, either through a real estate investment trust or crowdfunding platform.
You, as a shareholder, don’t own the property or choose what to do with it. Both of these investments operate more like stocks, albeit stocks attached to physical properties.
On one hand, we can see why this kind of investing is attractive. Buying an entire property outright can be costly and daunting if you lack the experience to know how to make it succeed. At the same time, you’re never going to get the same results from either method that you would from owning property yourself.
The problem? Both REIT investing and crowdfunding remove some of real estate’s greatest investing advantages.
3 Reasons to Buy Investment Properties
Ownership & Direction
One major incentive to buy your own properties when investing (rather than only investing in shares or small portions of real estate and real estate projects) is full ownership. It may be intimidating to be the captain steering the ship if you have little to no experience in real estate investment. However, being able to control, direct, and totally own your properties opens up a whole world of options. You can truly invest on your own terms and up to your own standards.
Real estate is one of the most versatile investment strategies in that there are countless variations in property types, investor activity levels, and overall strategy. As the sole owner of an investment property, you’re the one deciding who will manage it, perform maintenance, and execute improvements. Quality control is in your hands – based on who you choose to work and partner with. When you don’t own your property, you have no real say in the systems, services, or strategies utilized.
Some will say that investing in REITs and crowdfunding allows you to invest in real estate with little experience and without the responsibilities of landlording. But you can already do that – turnkey real estate investing means you get the benefit of full ownership and a passive strategy that leverages expert know-how.
Property Appreciation
If you’ve paid any attention to the real estate market over the past few years (and you have, or you wouldn’t be here!), then you know just how wild property appreciation has been. In the past year alone, we’ve seen markets jumping up in value by double-digit percentages!
The real benefit in owning real estate is that you can fully take advantage of this appreciation while also earning passive income. This reaps both short and long-term gains. The more valuable your property, the greater your personal assets and wealth and the more lucrative it will be to execute an exit strategy. That’s not to mention the fact that real estate is a hedge against inflation, meaning that it will continue to grow in value with inflation rather than diminishing.
When you don’t own the property in full, you cannot truly benefit from appreciation apart from the passive dividends the true owners will pay their investors.
Tax Advantages
Don’t own real estate? You don’t get to benefit from real estate tax advantages. When you engage with an REIT, you only see dividends, which can be taxed at different levels depending on whether or not they are classified as capital gains, income, or return of capital. When you own the physical real estate property yourself, you have plenty of tax advantages to help ease the burdens put upon your income, passive or otherwise.
Investor-owners benefit tax-wise through depreciation, deductions, long-term capital gains, and tax-deferral strategies like the 1031 Exchange.
The Bottom Line
Is it possible to invest in real estate without buying properties? Yes. However, the experience and the benefits are more akin to stock investments than real estate. Part of what makes real estate investment uniquely profitable and poised for effective long-term wealth building is the ownership. That ownership comes with a host of advantages you won’t find in other investments!
