3 Ways to Profit from Real Estate Without Buying a Property

Often, when people think about investing in real estate, they think of two paths: buying a long-term rental or flipping a house.

While these are common investment methods — especially the former as it’s simple,?often passive, and proven to yield high long-term returns — rising prices are making it more challenging for Southern Ontario investors to get into the market and grow their portfolios.

The good news is that there are alternative methods of profiting from real estate that doesn’t involve a 20% down payment, lock you into a mortgage, or require the DIY chops to renovate a home quickly.

Here are three of them:

REITs

Investing in a Real Estate Investment Trust (REIT) is kind of like buying a stock: you’re funding a company so that they can acquire and then generate income from properties such as shopping centres, apartment buildings, as well as commercial and industrial properties. In turn, you earn dividends on their profits, often paid quarterly.

REIT ETFs and Real Estate Mutual Funds are related investment vehicles that allow you to invest in portfolios of real estate products.

Pros:

• 100% passive
• Relatively low risk
• Low barrier to entry. Often, you can invest as little or as much as you like.
• Competitive returns, often better than HISAs or GICs

?Cons:

• Lower returns than owning property because you don’t get the?benefit of leverage, mortgage paydown, and capital appreciation
• It’s passive, but with that comes a lack of control over your investment’s performance
• Taxes: you have to pay your full marginal tax rate on all returns (like regular income)

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Crowdfunding

You’ve heard of GoFundMe, Indiegogo, Kickstarter and all the other sites where everyone chips into either support a cause or get first access to cool new innovative products yet to be built.

Well, real estate crowdfunding is a similar concept. It allows a pool of everyday investors special access to real estate ventures — often, properties that require significant capital to acquire — that they could not afford on their own. The idea, of course, is that you’ll eventually earn a significant profit.

There are a few things you’ll want to know before diving in, namely:

• What ROI can you expect?
• When can you expect to be repaid?
• Will you own shares in the properties?
• The track record of the company leading the fundraising

Pros:

• No mortgage
• Access to opportunities you couldn’t afford on your own
• Passive: no finding tenants, being a landlord or collecting rent
• Potential for high returns depending on the project and investment

Cons:

• While you don’t need to hold a mortgage, you may still need to invest significant funds to participate
• A potentially long investment horizon — not ideal if you need the flexibility to cash out

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Rental Arbitrage

Warning: this one requires some hustle.

With rental arbitrage, you rent a property from a homeowner long-term but, instead of living in the home, you sublet it as a short-term rental (STR) on Airbnb and similar platforms. The goal is to bring in more income through renting the property short-term than you’re paying the homeowner in monthly rent.

It goes without saying that, to protect yourself, you’ll need to do your homework and be 100% upfront (in a contractual manner) with the property owner before engaging in this kind of activity.

Pros:

• Low barrier to entry
• Potential significant monthly cash flow from a property you don’t own

Cons:

• Upfront investment to rehab and furnish the home (it needs to look nice as you’re competing with other STRs)
• Potentially time-consuming (you have to manage bookings, clean after every stay, maintain the property, etc.)
• There’s no guarantee you’ll cover your rent and utility costs
• You’re at the mercy of municipal law changes that could restrict STRs

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Do Your Research!

The options presented here are alternate paths to real estate profits that don’t require the same commitment as a traditional real estate investment. Depending on your situation and needs, they could present a way to diversify your real estate portfolio and, potentially, make significant financial gains.

But, just as we’d recommend before purchasing a townhome or a condo, make sure that you’re fully educated on any real estate investment opportunity presented to you. There’s no substitute for speaking with experts.

Reach out to us today!