Getting Into Real Estate Without A Down Payment Or A Mortgage

Peter's picture

It is often said, "Don't wait to buy real estate; buy real estate and wait!" Although these words might not ring true today in the midst of a housing market correction, having a portion of your investments in real estate can be an important way to further diversify your portfolio. So, does that mean you need to save for a down payment, get a mortgage, buy a house and then maintain it? Nope! Real estate investing can be a lot easier than that. Let's see how!

The Traditional Way

Let's face it, if you've never bought real estate before, it can be a pretty daunting prospect. There are buyers, sellers, buyers' agents, sellers' agents, lawyers, inspectors, bankers and insurers all involved in the picture. When you consider that all these people will expect to get paid for their services and that you'll need to show up with a hefty down payment, buying real estate can seem almost unaffordable! Once you've done it once or twice it ends up being a lot easier than it sounds, but it can be a large barrier to entry for a novice.

Besides that initial series of hurdles, there is also the risk involved in making such a large commitment. Not only do you become heavily invested in a single market sector, but you become heavily invested in a single asset within that sector. So in addition to having to deal with the fluctuations of the real estate market as a whole, if you end up with a faulty foundation or a leaky roof, you'll need to deal with that too. This can decrease any potential profits as well has hurt your cash flow in the short term.

Finally, once you've entered the real estate market in the traditional fashion, by buying a property directly, it can be a hassle to get back out. When you sell a piece of real estate, you need to find a buyer who is willing to buy your specific property at your asking price. This can take days, weeks, months or even years, depending on your asking price and your location. Once you do find an interested buyer, they will usually try to negotiate on price which can be a stressful situation for you when you are trying to get the most value possible from your investment.

The good news is, there's an easier way ...

The Easier Way

Real Estate Investment Trusts, or REITs, are a great method for getting into real estate, without the downsides listed above. A REIT is a company whose primary business is owning and operating income-producing real estate. REITs are required to pay out the vast majority of their profits in the form of distributions to their shareholders, usually on a monthly basis. You can purchase shares, or units, of a REIT in much the same way you purchase regular stocks. When you buy shares of a REIT you are buying a little bit of the company itself and as a result you own a portion of its assets and you are entitled to a portion of its profits.

Each month the REIT collects rent from all the tenants on all its properties and then it passes that money onto its shareholders. For example, RioCan, a Canadian REIT, currently pays $0.1125 per share to its unit holders each month. So if you owned 100 units of RioCan, you would get $11.25 each month in income. If the income earned by the REIT goes up or goes down then the distributions will be raised or lowered to match.

You can buy and sell units of a REIT on the stock market so your investment is much more liquid than if you owned real estate directly. In general, if the value of the properties that make up the REIT increase in value, then the REIT units will increase in value appropriately, and vice versa.

By using REITs, you can enter the real estate market with much less trouble and on a much lower scale than when you buy real estate directly. You also don't have to worry about getting a call in the middle of the night about a flooded basement!

Other Considerations

Just because you don't have to deal with the legal, financial and practical issues related to owning and operating a direct real estate investment, it doesn't mean that the you don't pay the costs. REITs incur expenses on your behalf and those expenses are taken from any rental income that the REIT earns before it gets paid to the trust's unitholders. So, you are still paying for these things; you just don't have to deal with all the hassle yourself.

Another thing to watch out for before deciding to invest in REITs is that there are two kinds of REITs: Equity REITs and Mortgage REITs.

Equity REITs own real estate directly, like I've discussed here today. Mortgage REITs fund mortgages and make money off interest payments from those mortgages. They don't own real estate directly. As a result, mortgage REITs need special analysis and I wouldn't recommend them unless you are comfortable with that type of investment.

Wrap Up

Investing in REITs can be an easy way to gain exposure to the real estate market without the need for all the overhead and hassles typically associated with investing in real estate. You can get into the market with a much smaller initial investment. Your investment is very liquid so you can pull your money out quickly if you want to invest in something else. You won't have to deal with the usual joys of being a landlord such as finding tenants, collecting rent and fixing toilets. Yet, you still get to take advantage of regular rental income and the potential for capital appreciation of your investment.

REITs might be something for you to consider if you are looking to get into real estate but you're wary of buying properties directly.

Disclaimer

If you enjoyed this post you may want to consider subscribing to Plan Your Escape via Email or via RSS feed.



Comments

Definetly, investing in a

Definetly, investing in a real estate would balance your portfolio. It is absolutely necessary to diversify as much as you can. Especially entering a real estate market is generally, under normal circumstances, less risky than investing in a stock market. I used to advise my clients to invest and then rent-to-own, having the mortages covered with rental incomes but REIT seems as good alternative.

Post new comment

The content of this field is kept private and will not be shown publicly.
  • Web page addresses and e-mail addresses turn into links automatically.
  • Lines and paragraphs break automatically.
  • HTML tags will be transformed to conform to HTML standards.

More information about formatting options