Did you know it’s possible to invest in real estate without buying a property? While not the traditional way property investment is done, there are many alternatives for those who wish to set a foot on the property ladder without committing a large chunk of capital to a single asset.
Join us as we look at some of the different methods of real estate investment.
Inside this guide
Buy shares
Invest in real estate companies and developers
The first approach investors may use to invest in real estate without actually buying property is to buy shares in companies who deal in, or with, property.
This could mean buying shares in companies such as property developers or real estate listing companies. You could even choose to invest in companies who manufacture construction materials or provide services to property companies.
By using this method, investors can gain exposure to the property market without needing to lay down large amounts of cash on an individual asset.
How an investor could use this method:
- Research options by looking at companies in the real estate sector on the Australian Stock Exchange (ASX). A list of potential real estate stocks can be viewed via the Simply Wall St stock analysis tool Australian Real Estate Stocks).
- Choose which company/companies you would like to buy shares in and decide how much you would like to invest.
- Buy your chosen shares via a stockbroker or share trading platform.
- Monitor performance and continue to buy or sell shares at will.
Pros
- ‘Hands-off’ ownership, since you don’t have to maintain and manage properties personally.
- Invest small amounts or larger amounts, your choice.
- Liquid investment, meaning that it’s easy to convert your asset back into cash by selling shares.
- Diversify your portfolio by investing in companies listed in international markets, giving you exposure to markets in US, UK, EU, etc.
Cons
- Share prices can be volatile, so your investment value could increase or decrease quickly in the same way as any other share market asset.
- Income is not guaranteed, because not all companies pay a dividend every year.
- Constant monitoring may be necessary to decide when to buy, sell or hold.
A more passive approach
Invest in REITs (real estate investment trusts)
The second approach an investor might use to avoid traditional property investment is to invest in Real Estate Investment Trusts (REITs). These can be found and traded on the ASX, and give investors exposure to property investment without having to be ‘hands-on’ property owners.
Typically, REITs are managed funds that pool together money from a group of investors. This money sits in a trust, which uses the money to build a portfolio of income-producing property.
Generally, the REIT will lease out the owned properties and collect rent. This produces income for the trust, which is shared with the investors. Investors are also able to benefit from any capital growth generated.
How an investor could use this method:
- View and research available REITs listed on the ASX. These may be viewed here.
- Choose the REITs you would like to invest in and decide how much you’re willing to invest.
- Find a broker or trading platform and buy units in the selected REIT(s).
Pros
- ‘Hands-off’ property investment, so you don’t need to spend time on management, maintenance and collecting rent.
- Choose your investment amount, large or small, rather than having to fund a large investment in a single property.
- Liquid investment, because you can sell your REIT units on the open market whenever you like, rather than having to go through the long process of selling a property.
- Use a REIT to invest in a specific type of property, e.g. commercial, residential, office, health, etc.
- Exposure to growing international property markets with REITs available for US, UK, Europe, Asia, etc.
Cons
- Unit prices of REITs are subject to market volatility in a similar way to shares, so it can be risky and you could lose money, especially with a short-term holding.
- Extensive research may be required because there are around 50 A-REITs listed on the ASX, each with a different focus (e.g. residential, commercial, retail, industrial, agricultural, energy, global properties).
- You can’t get a mortgage to buy A-REIT units.
Another option for passive real estate investors
Invest in real estate ETFs (Exchange Traded Funds)
The third approach an investor may use to avoid buying property is to invest in real estate ETFs.
ETFs are managed funds that can be bought or sold on the stock exchange. Generally, they track and aim to mirror the performance of an index of publicly traded companies. Typically, this means they own shares in multiple companies listed on a stock exchange.
In the case of real estate ETFs, this could mean the ETF owns a small part of many real estate-focused companies listed on the ASX.
How an investor could use this method:
- Research real estate-focused ETFs.
- Choose an ETF (or selection of ETFs) and decide how much you’d like to invest.
- Purchase the ETF(s) through a stockbroker or online trading platform.
Pros
- ‘Hands-off’ form of property investment, because the property maintenance and rent collection are taken care of by the companies included in the index on which the fund is based.
- Instant diversification, since your investment is spread over a large number of property sector companies, rather than in one, or perhaps two, actual buildings.
- You can get international diversification by investing in ETFs listed on stock exchanges in the US, UK, Europe, NZ, etc.
- Easy liquidity, because ETF units can be sold on the open market.
Cons
- Subject to price volatility, just like ASX-listed shares, although inbuilt diversification generally lowers the risk.
- Borrowing to buy may be more difficult, that is, it may be easier to get a mortgage to buy an investment property than get a bank loan to invest in ETFs.
- Investor has no control over choice of properties, being two steps removed from the decision on which properties to buy or sell.
An alternative to REITs and ETFs
Explore fractional ownership platforms
The fourth method of property investing worth considering is fractional ownership platforms.
Fractional ownership platforms allow investors to buy a portion of a property, rather than the whole asset.
Generally, the platform manages the property while the investor earns income from rent. The investor is also given their share of any capital gains.
How are fractional ownership platforms different to REITs?
Although similar, REITs and fractional ownership platforms are not the same.
While REITs offer investors shares in a fund (trust) that invests in multiple properties, fractional ownership platforms let investors buy a portion of a specific property.
What are some examples of fractional ownership platforms?
Some examples of fractional ownership platforms in use in Australia include DomaCom and BrickX.
DomaCom works by allowing an investor to contribute to the purchase of a property of their choice. If enough investors also choose to invest in the same property, DomaCom facilitates the purchase and manages the investment, with investors receiving a portion of net rent earned after expenses. DomaCom has a minimum investment amount of $2,500.
BrickX works in a similar way to DomaCom except that it buys the property and then invites investors to buy portions of it (‘bricks’). It also requires a smaller minimum investment amount than DomaCom, since the price of a single ‘brick’ can be as low as $35. Like DomaCom, BrickX manages the property and investors can earn a portion of the net rental income and capital growth.
How an investor could use this method:
- Research available fractional investment platforms (eg. BrickX and DomaCom).
- Choose a fractional investment platform and decide how much you would like to invest.
- Follow steps to carry out the investment (this differs between platforms).
- Begin receiving net rental returns according to proportion of property owned.
Pros
- Low funding cost to invest, as little as $35 or $2,500, depending on which platform you choose.
- Selling a fractional investment may be quicker and easier than selling an entire property.
- No direct involvement in property management or maintenance, because the fractional ownership platform does the work for you.
Cons
- Exposed to some of the same risks as direct property investment, such as property vacancy (no rental income).
- Limited choice of properties to invest in, compared with buying your own investment property.
- Investor cannot get involved in adding value, for example by renovating the property.
Before you invest
Points for consideration
Before using an alternative method of property investment, an investor may find it helpful to consider the following points:
- What are my investment goals? Could this help me achieve them?
- How do the upfront costs and associated fees compare with the potential returns?
- What are the risks of the investment? How can I better understand the risks? (A financial advisor may be able to help with this.)
- How much time will I need to put into the investment to achieve my goal?
- How liquid is the investment? (i.e. How easy is it to turn my investment into cash?) Shares, REITs and ETFs are more liquid than fractional property ownership.
- Are there any other investment methods that could suit me better?
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