I really like the idea of investing in real estate, especially renovating a home to increase its value. Real estate is a type of investment that really allows you to be hands on and put in some sweat equity. It also allows you to use leverage, which means that you can control a lot more value than you initially put in. The appreciation will be based on the full value of the asset, and not only on your deposit. This means that there is great potential for profits. All this sounds very interesting.
I see SO many Youtubers, authors, tv shows, etc, advocating for real estate investing, and talking about the big profits that they have made. And that’s probably true. Real estate can be a great way to create wealth.
Problem is, it’s not so simple for everyone. Not everyone is in the US and not everyone has the same options. Maybe in the US people have more options for smaller down payments and more affordable housing depending on the area. Here are some reasons why I do not own an investment property in New Zealand:
- Minimum down payments (or deposits, as we say here) for investment properties are 40% of the value of property. 40%! Ouch! That’s a lot of money to save up. A high deposit usually also means lower cash on cash returns. You can use equity in your home if you already one, but bear in mind that this can affect your mortgage payments.
- There are a few different incentives for first home buyers in New Zealand, like being able to withdraw your Kiwisaver (our retirement scheme) and the First Home Grant which is an incentive from the government that can pay a couple up to $20,000. Kiwisaver + $20,000 could be enough for a deposit. However, those incentives can only be used for residential properties. If you buy a rental property before buying your first residential home you lose all those benefits.
- The market is very inflated. I know that this is true for a lot of places, but it’s a huge problem in New Zealand. It’s unlikely that you would find a rental property that will cashflow and a lot of investors just bet on prices going up.
- You might find fixer uppers that are more affordable, but some things need to be taken into account. New Zealand had a huge problem with leaky homes in a not so distant past, so a thorough check would be needed and costs accounted for. Also, labour and building materials are very expensive here. Another thing to consider is that properties will likely be in less desirable areas and with less demand. I’m not saying that they would not be profitable or cashflow, but demand is different in different places and it would be very wise to get to know the local market before investing your money.
- The government has made changes to tenancy guidelines, and it is now a lot more difficult to dispute and eventually evict a tenant if necessary. If tenants are not paying rent on time or looking after your property it’s going to be a difficult process to get this sorted. Landlords must be very careful when screening tenant, but there is always a risk.
- I’m personally not interested in dealing with tenants, so this is another reason I prefer other investments at the moment.
All this is to show you that buying a property is not always the best investment for everyone. This is true especially if you do not already own a property that you can leverage to pay for the high deposit. Also don’t forget that if you are using leverage while you have can potentially have great returns, you are also taking risks.
In saying all this, the market is very inflated and there are many investors making profits every day. Many are home owners who used their equity to get started. Now me, I might buy an investment property in the future, after taking full advantage of all the benefits I can have to buy a first residential home. And I will keep having fun with other investments until then.
However, I still want a piece of the action right now. Not only in New Zealand, but globally. And it’s possible to do it. Here are some ways you can invest in real estate without owning property:
- Real Estate Exchange Traded Funds (ETFs)
ETFs are funds that track the price of an index, sector or other asset and they are traded like stocks.
You can invest in real estate ETFs such as the VNQ Vanguard Real Estate and the IYR iShares U.S. Real Estate. The first gives you exposure to U.S. equity Real Estate Investment Trusts REITs and the latter follows the Dow Jones U.S. Real Estate Index, including REITs and firms investing in real estate. Here is a good list of the top 28 US-traded ETF’s.
If you’re in New Zealand like me, you can invest in the NPF NZ Property ETF which invests in property assets listed on the NZX. and tracks the return on the S&P/NZX Real Estate Select Index
- Real Estate Mutual Funds
You can also invest in real estate mutual funds. These funds invest primarily in REITs and real estate operating companies. Depending on their strategies they can offer more diversification than investing directly in REITs.
Some real estate mutual funds you can invest in are the TIAA-CREF Real Estate Securities Fund and the Baron Real Estate Fund. There are many other funds to choose from, so make sure to do your research and check how much you will be paying in fees.
- Real Estate Investment Trusts (REITs)
REITs (or Listed Property Trusts in NZ) are investment funds that own income-producing properties. They are created when a company or trust is formed to use investors’ money to purchase, operate, and sell those properties. REITs are traded on major exchanges, just like stocks.
In the US REITs are required to pay the majority of its taxable income as dividends, which can provide good returns to investors. Some of the REITs you can invest in are the Annaly Capital Management Inc. (NLY) and the AGNC Investment Corp. (AGNC). Some os the REITs you can invest in in New Zealand are The Kiwi Property Group (KPG) and the Goodman Property Trust
- Real Estate Notes
Another way you can invest in real estate is through buying mortgage notes from lenders who no longer want them. These notes are essentially debt, and once purchased the investor can collect mortgage and interest payments from the borrower. This is a more risky investment, and usually done by experienced investors.
- Hard Money Loan
If you have enough cash, but don’t want to purchase properties yourself, you can consider offering hard money loan. Hard money loans are essentially a loan to a real estate investor, which will then be used to invest in property. Usually you can agree on the terms of the investment, including the return you will make on your cash.
- Own stocks in companies related to real estate
This is a simple strategy to get real estate exposure. Like investing in REITs and real estate ETFs that are traded in the stock market, you can also directly buy shares in companies in the real estate business, like construction companies. This gives you more choice and possibly diversification than when you invest in a real estate fund.
These are some options to invest in real estate without owning property. The returns will not be the same as owning properties yourself, especially if you’re using leverage. In some cases the returns will reflect more the overall stock market’s performance. However, these can still be good options to have real estate exposure.
The list does not cover all options available, so I definitely suggest you do your research and see what options are available to you. This is simply a list and not a recommendation of any kind of investments. If you are unsure, I always recommend speaking to a financial advisor who can help you design an investment strategy specifically to you.
Do you invest in real estate? Do you own properties? Let me know your thoughts in the comments below 🙂