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Alternative real estate investing

A few weeks back I wrote on investment properties and being a landlord. As I mentioned, it is not for everyone. However, for those of you who want to invest in real estate without being hands-on as a landlord, here are a few other options:

REITs

Real estate investment trusts are companies that own — and in most cases, operate — income-producing real estate. Many are publicly traded and thus can be invested in through stock purchase. The benefits are that most are high yield producing, pay tax-friendly dividends, allow easy re-investment and shares are more liquid than owning the bricks and mortar yourself. Plus, the commercial real estate sector is really benefiting from these historically low interest rates. You can invest as much or as little as you want in most cases, meaning it’s far easier to ‘get in the game.’ This option allows you to reap the gains of the real estate market, without doing much work at all.

Partnerships and private lending

I’m not a big fan of partnerships because as you often hear: ‘Partners are for dancing.’ However, if done correctly, this sort of approach can have big rewards. If you’ve got money, but not the time or experience to be working directly on a real estate investment, why not invest in a person instead? There are many developers of varying size that are looking for investors. This can be risky, but private lending often happens at 10 per cent + interest rates, plus fees. That’s a better return than most markets, and there are no rules limiting how you structure the relationship.

Rent-to-Own

There are numerous would-be buyers out there who for one reason or another are not currently in a position to purchase. Usually it’s the result of bruised credit or a lack of downpayment. Arrangements can be made whereby an investor purchases a home with a pre-arranged future sale to the individual who, in the interim, will be their tenant. Rent is collected that covers all the expenses of the investor, plus an additional amount is collected each month as a premium and contribution toward the tenant’s eventual downpayment. The tenant is responsible for all maintenance, so even though you’re a landlord, you’re responsibility is low. A significant non-refundable deposit is collected up front, and the future sale price ensures a tidy profit for the investor-owner.

Speculative Buying

This drives much of the condo market in major cities. Buy units pre-construction and sell for a profit post-construction. I’m of the opinion that locally, this is a very dangerous strategy as the condo market is sluggish. However, some developers are guaranteeing rent. So you can purchase a unit pre-construction, have a guaranteed rent for a period of (x) months/years, and then hopefully sell at a profit down the road.

Primary Residence

The simplest way to climb the property ladder? Pay off your primary residence aggressively. This is probably your most important asset anyway. If you want an easy way to reap the benefits of real estate investment, pay down your house. Right off the bat, you’re likely paying an interest rate of around three per cent to five per cent, so your effective return on paying down your mortgage is already three per cent to five per cent. Plus, if you’re getting any market appreciation on your home (say an additional three per cent), you’re getting pretty good value for this ‘investment.’ This is the most risk free, low-effort approach, and I know it’s not really investing per se. But if you can get to a position where you’re mortgage free years before your peers, that not only has a huge impact on your cash flow and equity position, it also frees you up to other more aggressive investing in the future.