How You can Invest in Real Estate Without Ever Buying a Property

Unless you’ve been living under a rock for the past twenty years, you’re already familiar with the popularity of investment properties. It seems every man and his dog has an investment property. Or even a portfolio of properties. Thanks to negative gearing and attractive interest rates, owning multiple properties has become an option for many people.

Still, it’s not for everyone. Some people don’t like the idea of commitment. Some don’t want to make a huge capital investment — especially when we’re in the midst of a housing bubble. Lots of people (quite sensibly) don’t want to borrow to invest.

If this sounds like you, keep reading.

How most people invest in property

Current ATO stats show that nearly 1.9 million Aussies report a rental property income every year. This number has gone up every year since the ATO started collating the stats in 1999. This includes individuals who own properties by themselves, with a spouse or as part of a group.

Most people start by looking at their wages and working out how much they can afford to commit to a mortgage and expenses. Then they use that number to work out how much they can borrow. Lending to investors is big business. ABS stats show that banks and other lenders commit to several million dollars’ worth of loans for individual property investors every month.

Once they have a budget, they start looking at currently advertised properties within their price range. More engaged investors might cross reference their budget with a list of ‘hot’ locations. These are locations which are tipped to offer capital growth and/or strong rental income.

Once they’ve saved a deposit and bought a place, they hand over to a property manager. They then enjoy a passive income for X number of years until they want/need to sell the property.

Why buying a property investment might not be right for you

Many commentators use the phrase ‘mum and dad property investors’ to describe people who use the method above. It’s a popular way to describe couples of a certain age who see real estate as a safe property investment option. But it also has negative connotations. The phrase implies a lack of sophistication, intelligence and originality. Think about the phrase ‘mum and dad business’. When you hear it, you don’t exactly picture a sophisticated tech start up. More like a corner fish and chip shop.

This is because the mainstream way of investing in property is based on a lot of assumptions. For example, it assumes you have to buy the property. It assumes that you have to be the only owner. It assumes you’ll be working for most of the period in which you’re holding the property. And that you’re willing to hold the property for a certain minimum time frame.

You might not want to:

  • borrow tens (or hundreds) of thousands of dollars
  • make a long term commitment
  • bet against the existence of a housing bubble
  • put in lots of money up front
  • be reliant on negative gearing (for the term of your mortgage, at least)
  • deal directly with a property manager
  • have to decide what is (or isn’t) a good strategic investment

You might prefer to:

  • test the waters with a small investment
  • invest in commercial (not residential) real estate
  • get income from a long term lease
  • be a part owner, not a sole owner
  • have flexibility over when you take your money out

Here’s one way you can do it.

What the alternative is to buying an investment property

A real estate investment trust (REIT) is a trust company that owns, maintains and manages real estate for the benefit of shareholders.

You can buy shares in an exchange-traded REIT just like you’d buy any other shares.

Think of it like investing in an investor.

The ASX says:

‘The major benefit of A-REITs (Australian REITS) is that they can provide access to assets that may be otherwise out of reach for individual investors, such as large-scale commercial properties. A-REITs may appeal to investors looking to diversify their portfolio into property with potential to receive a regular and consistent income stream… (they) generate wealth in two ways: they provide exposure to the value of the real estate assets that the trust owns and the accompanying capital growth, as well as rental income.

 

Many REITs specialise in a particular type of property. Some hold retail premises and shopping centres. Some own office buildings in big cities. Others own hotels and hospitality premises. Should you opt to go down the REIT path, your choice may (partly) depend on what sector you’re personally interested in. For example, if you’re anything like me, you might get a bit of a thrill from knowing you’re a part owner of an iconic bit of a city skyline.

Investing in overseas property markets

Buying stock in a foreign REIT is a popular way to access property markets that lock out direct purchases by foreigners. It’s also popular for people who want to really diversify by spreading their investment across lots of different property markets. To add another layer to the diversification cake, some overseas REITs in turn invest in properties from third countries.

There are many different exchanged traded REITs across the world. For example, J-REITs are traded on the Tokyo Stock Exchange (TSE). There are 26 S-REITs on the Singapore Exchange (SGX).

Some markets have had REITs for a long time, and some have just introduced them. American REITs have been traded on the NYSE since 1965. On the other end of the scale, Thailand — which doesn’t generally let foreigners own investment properties directly — has only had REITs traded on the Stock Exchange of Thailand since 2013.

Eva Mellors
Contributor, Money Morning 

P.S. If you’re keen to learn about other dividend-paying stocks too, don’t miss our editor’s report on boosting your income using dividends. To get your copy of this exclusive report, simply claim your free Money Morning subscription now.


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