Ways To Invest In Real Estate Without Owning Property
The real estate market in Pittsburgh has been very strong for a long time. We've witnessed entire neighborhoods go from run down shacks, to half a million dollar condos in a matter of 3 years. It seems like construction is on every street near the city as more people move to Pittsburgh for work, and younger families renovate or purchase some of the older outdated housing. Many local investors have experienced great rewards and profits when flipping houses, as well as building up rental portfolios.
This inflow of money has created a large following of new investors who want to enter the market. We get calls almost daily on how to invest in real estate, and ambitions to enter the real estate market. The difficult part for new investors is, they have no experience in this line of work, or work full time and can't dedicate the time needed to run a real estate investment business in Pittsburgh.
Here are 3 ways you can be an investor in the real estate market, without owning the property, and having the liability of management.
Wholesaling is the process of finding distressed deeply discount properties in Pittsburgh and finding real estate investors to sell them to. The process is pretty simple. You will utilize an agreement to give you the right, but not the obligation to purchase a property at a certain price. The goal is to get this at a massive discount from its market value. Then as a wholesaler, you present the contract to cash buyers in the market looking for more projects to buy. You offer the property at a price slightly higher than your agreement. They will be happy to pay a premium as it will still be discounted from market value, and you found them a deal to buy. The spread you make on the transaction is your release fee for selling your contract to the new investor!
This process does not require you to ever own the property. You do not take on any of the construction risk either. It is more of a sales business than a real estate business, but it allows you to take part in the real estate market with a very small investment, and can produce high pay outs.
2. Private Financing
For investors who have no experience owning property, but have a bundle of cash sitting on the sidelines in a savings account, this can be a great opportunity for you. As a private lender, you provide the capital needed for an investor to buy and renovate the property. They will complete the project, and either sell the house or rent it out. At this time, the investor will receive the funds to pay the private lender back, and repeat the process again. This is a truly residual form of investing without ever owning the property. The investor pays a monthly interest cost at very high rates to the lender. These can be 10-12% for more experienced borrowers and sometimes 15% for newer investors who don't have a track record yet!
These loans are short term. They tend to be for 1 year or less, and in most cases are paid off even sooner. Private financing for real estate transactions is a win win for the borrower and investor. The investor gets access to cash at once to purchase and renovate a property with little to no cash out of pocket on their end. They have to pay a high fee for this luxury. That interest rate is an incentive for them to complete the project quickly and sell or refinance the house. The lender on the other hand, receives a very generous interest payment each month without any management of the property or renovations. They also have a sense of security as the property is the collateral for the loan. If they need to take the property over, they should be able to still profit as the house was bought at such a deep discount.
This stands for a Real Estate Investment Trust. This is a fund with an investment manager who manages the capital from investors. They purchase large commercial properties, single family houses, or financing properties as well. It is a way to invest in a large investment company that has diversified assets in many different locations and property types. These are actively traded on the stock market, which means it can generally be bought or sold quickly. You as the investor do not personally own the properties, you own shares in the business. The company itself holds the liability and management of the projects and loans. You simply reap the benefits of ownership of the shares that may increase in value, and the dividends that are paid out. These companies are known for paying very high dividends, which is a percentage of the profits paid to shareholders like yourself. It is a great way to gain exposure to real estate, but the ability to cash out relatively quickly if you need your cash back.
Being a real estate investor doesn't always mean you have to own properties! While this is the most common form of investing, there are avenues that have been structured for the investors seeking exposure to the real estate market, but want something outside of the conventional rentals and flipping houses.