4 ways to build your real estate portfolio without buying property

When most people think about developing their real estate portfolio, they picture purchasing real property (such as a house or a commercial property). While those options are among the most common real estate purchases, owning a physical property is not the only way to enter into real estate market.

Owning a property can be a very hands-on experience that isn’t right for everyone.  Understanding which type of real estate asset will work for you means considering your lifestyle, tax situation, and risk tolerance. Today, we’re going to look at 4 passive, hands off ways to develop your real estate portfolio that do not involve buying physical property.

Real estate investment trusts (REIT)
A real estate investment trust, or REIT, invests in income producing properties like apartment complexes, plazas, and shopping malls. People who own units in REITs receive income and return of capital distributions. REITs allocate income to unit holders and do not pay income tax.

REITs can be either public, or private.

Public REITs are available on the stock exchange and are easily determined by market value. In addition, public REITs generally have a low cost of entry, provide more frequent reporting and higher liquidity.

Private REITs are bought in the exempt market. While they are not burdened with the same regulatory cost of a public REIT, they are also not subject to the same oversight and therefore may carry more risk. There may not be a market for private REIT units if the investor wishes to exit.

Often REITs acquire real estate through tax free rollovers of privately held portfolios. The units issued on the rollover of the property are equal to the tax cost of the transferred real estate and generate distributions to its unit holders. In these cases, the REITs carry large inherent long term deferred tax contingencies.

Real estate mutual fund
A real estate mutual fund is a diversified pooled investment containing such assets as bonds, mortgages, REITs, and public real estate stocks. To invest in a real estate mutual fund, units and shares are purchased or redeemed at the current Net Asset Value (NAV) of the fund. These funds and have various levels of entry for initial investment. Mutual funds are   reporting issuers and are traded by subscribing for or redeeming the units with the fund at net asset value (NAV). Real estate mutual funds are not that common because real estate holdings are not sufficiently liquid to fund constant redemptions. The return on real estate mutual funds are generally lower than REITs because the net assets are invested in cash to fund potential redemptions.

Real estate limited partnership (LP)
Governed by limited partnership agreements, these investments are controlled by a general partner who manages the development and operation of a real estate property. LPs could buy undeveloped land with the expectation of developing it or selling it for a profit. Alternately, the investment could be a rental property.  In general, LPs are available in private markets. LPs do not pay income tax and corresponding profit and/or losses are allocated to its investors (subject to certain restrictions). One potential negative of investing in an LP is very often the invested funds are tied up in real estate, making the LP not very liquid. Thus, investors are usually restricted in being able to access their capital  in the LP,  until a triggering event occurs, such as the sale of underlying real estate property/development or a debt refinancing on the property.

Mortgage investment entity
Most often, investors buying into a mortgage investment entity (MIE) are purchasing shares of a mortgage investment corporation (MIC), though sometimes the structure could be a limited partnership or a trust. MIE pools money raised from investors and then lends those funds to real estate borrowers. This could include financing or mortgages for borrowers who are unable to obtain financing from a traditional bank.

Given that MIEs often invest in debt securities, income is earned from the mortgage interest, financing fees, mortgage renewal fees, and cancellation penalties. To reduce the risk to investors, MIEs will often hold many loans at once.  There is a potential liquidity risk associated with investing in a MIC, because the MIC may not have funds available on hand if many investors want their investment back at the same time. Additionally, the underlying real estate behind these private mortgages can be high risk. Should values decline and a borrower defaults, the MIC may not recover all its investment when the property is eventually disposed.

Considering an alternative RE investment?
If you’re interested in further developing your real estate portfolio with alternative investment opportunities, it’s worth discussing the decision with a trusted business advisor. At Zeifmans, our real estate experts can help you to gain an understanding of your unique financial situation, before making any big decisions on what’s next for you and your real estate portfolio.

To learn more, reach out to us today.


Q&A with Partner, Jennifer Chasson

Q&A with Partner, Jennifer Chasson

With over 25 years of experience and 100+ successful transactions under her belt, Partner, Jennifer Chasson, brings invaluable expertise to the table. Whether it’s guiding as an advisor, mentor underwriter, ...