Investing in real estate doesn’t have to be a dirty job. Here are three strategies to help hands-off investors make money from real estate.
Real Estate Notes
A real estate note is a type of promissory note such as a mortgage or deed of trust, which is secured by a real estate asset like a house. The borrower promises to repay the lender a certain portion of the debt at regularly scheduled intervals. While the original lender may be an individual note investor, usually the first lender is an institution such as a bank. Individual note investors also can purchase existing notes from banks, hedge funds, or other individual investors.
One way investors make money from real estate notes is to collect the debt payments with interest. Existing real estate notes are classified as performing or nonperforming. A performing note means the borrower is current on the note payments. With a nonperforming note, the borrower usually is at least 90 days behind in payments. A hands-off investor who is buying an existing note should purchase a performing note. Nonperforming notes are labor-intensive.
Publicly Traded Real Estate Investment Trusts
Investors in real estate investment trusts, often called REITs, buy shares of commercial real estate portfolios. Some REITs specialize in a particular class of real estate assets like multi-family apartments or office buildings while others have diverse property holdings. Publicly traded REITs sell shares to individual investors via a national securities exchange. In addition, there are legal mandates that publicly traded REITs must follow to maintain their status as a REIT.
REITs have several advantages for the hands-off investor. REITs give shareholders real estate ownership without the stress of being a landlord. Unlike traditional real estate ownership, publicly traded REITs are liquid. They are bought and sold in the same manner as stocks. Finally, REITs are a source of cash flow for their shareholders. To legally qualify as a REIT, it must pay out a minimum of 90 percent of its annual income as dividends to shareholders.
Hiring a property manager is another way a hands-off real estate investor can own real estate assets such as a house or apartment building without being a hands-on landlord. The property manager’s role is to take care of typical landlord duties like collecting rents, screening tenants, and handling maintenance. A property owner should expect to pay 8% to 12% of the monthly rental income as the property manager’s fee.