Real estate has a reputation for being a hands-on investment. And for a lot of investors, it is. Managing tenants, coordinating repairs, handling late-night maintenance calls, and dealing with turnover are all part of the traditional landlord experience. For some people, that level of involvement is fine. For others, it’s the reason they never invest in real estate at all.
But direct, hands-on property management is not the only way to get real estate exposure in your portfolio. There are multiple paths into real estate investing that range from completely passive to moderately involved.
Understanding the full spectrum helps you find the approach that fits your life (and your tolerance for being bothered at 11 p.m. about a broken water heater).
REITs
Real Estate Investment Trusts are the most accessible and passive way to invest in real estate. A REIT is a company that owns, operates, or finances income-producing real estate across a range of property types. When you buy shares of a REIT, you’re buying ownership in a portfolio of real estate assets without directly owning, managing, or even seeing any of the properties.
REITs trade on major stock exchanges, which means you buy and sell them the same way you’d buy shares of any public company. The barrier to entry is whatever the share price is. Some REITs trade for under $20 per share. You don’t need a down payment or mortgage, and you don’t need to know anything about property management.
By law, REITs are required to distribute at least 90 percent of their taxable income to shareholders as dividends. This makes them attractive income investments. (The dividend yields on many REITs are meaningfully higher than what you’d earn from a broad market index fund or a savings account.)
Real Estate Crowdfunding
Crowdfunding platforms have opened up a middle ground between buying REIT shares and purchasing property directly. Platforms like Fundrise and RealtyMogul pool capital from individual investors and deploy it into specific real estate projects or diversified portfolios of properties.
The minimum investments are typically low, ranging from $500 to $25,000 depending on the platform and the offering. You get exposure to commercial real estate, multifamily developments, and other property types that would normally require millions of dollars to access directly.
The passive nature of crowdfunding investments is a major draw. You invest your capital, the platform’s team handles the acquisition, management, and eventual disposition of the properties, and you receive distributions based on the income and appreciation those properties generate.
The downsides are liquidity and risk. Most crowdfunding investments have lock-up periods ranging from one to five years or longer. Your money is committed for that duration, and getting it out early is either impossible or comes with penalties. The platforms also carry varying degrees of risk depending on the types of projects they fund.
Buying Rental Property With a Property Manager
This is the option that gives you the most control and the most upside while still keeping your daily involvement minimal. You purchase a rental property and hire a professional property management company to handle everything. At that point, you simply act as the owner who reviews financial statements and makes strategic decisions rather than fielding tenant calls.
A good property manager handles tenant placement, screening, rent collection, maintenance coordination, lease enforcement, inspections, and turnover. Their fees typically run 8 to 12 percent of monthly rent, plus placement fees for filling vacancies. That cost comes out of your cash flow, which means the numbers need to work with management fees factored in from the start.
The advantage over REITs and crowdfunding is that you own the asset directly. You benefit from appreciation, cash flow, tax deductions, etc. You also have control over when to sell, and how the property fits into your broader financial strategy.
Hard Money Lending
If you want real estate returns without owning property at all, hard money lending is worth understanding. As a hard money lender, you provide short-term loans to real estate investors, typically for property acquisitions and renovations. The loans are secured by the property itself, and the interest rates are significantly higher than what conventional lenders charge, usually in the range of 10 to 15 percent annually.
The risk with this kind of investing is default. If the investor can’t complete the project or can’t repay the loan, you may end up taking ownership of the property through foreclosure. At that point, your passive investment becomes a very active problem. Mitigating this risk means lending conservatively, typically at 65 to 70 percent of the property’s after-repair value, so that even in a worst-case scenario, the property is worth more than what you’ve lent against it.
Finding Your Fit
Most experienced investors end up using more than one of these approaches as their portfolio grows. The common thread across all of them is that real estate investing doesn’t require you to be a landlord. You just need to be thoughtful about which path matches your situation. If you combine that with a certain degree of selectiveness, you’ll do fine in the long run.
