- Real-estate investors often seek to generate passive streams of income.
- Several under-the-radar methods can help real-estate investors achieve that goal.
- REITs, tax lien investing, and ‘subject to’ investing are three strategies investors can utilize.
Real-estate investors have one thing in common: they want to generate income.
And for many, the more passively they can generate that income, the better.
Creating a stream of passive-income (which requires minimal effort for an investor to actively maintain) is a widely held goal by those who seek to keep money coming in after their initial investment.
Collecting rent is the classic example, but there are options besides landlording, like
REIT
and tax lien investing, which investors can use to start generating profits. The point is to generate streams of income that don’t require extensive effort from the investor themself.
In the US, real-estate ownership has long represented financial freedom and the opportunity to build generational wealth — in a Gallup survey published in 2019, 35% of 1,012 US adults polled said real estate was the best way to build wealth.
Compared with other asset classes, real estate can have the strongest long-term growth potential. Expected annual total returns on apartment investments have fluctuated between 6 and 15% since 2012, according to the National Council of Real Estate Investment Fiduciaries, while over the same period, the S&P 500 had an annualized return of about 10%. In 2019, one-year returns on REITs were 20%, outperforming all other asset classes, per data from National Association of Real Estate Investment Trusts.
With that in mind, Insider outlined a handful of investment strategies that make it easy for beginners to get started investing in real estate, according to real-estate pros and “clever investor” Cody Sperber, who started investing in real estate with no money to his name and has now done hundreds of millions in deals.
Investors can generate passive income in a variety of ways, depending on just how involved they want to be in the process and how much time and capital they have to invest.
Tax lien investing
When you purchase a home, you’re required to pay property taxes. And if a property owner defaults on those taxes, Sperber said, the city government can make a legal claim — or “lien” — against the property for the amount owed.
That’s where a tax lien investor can step in.
For the city to recover the money the property owner hasn’t paid, the city sells tax lien certificates to investors. The delinquent homeowners then have a period of time — usually 120 days — to pay the investor the tax, penalties, and interest owed, Sperber said. If they fail to pay off the delinquent amount, the investor can foreclose on the lien and take possession of the property.
That said, tax lien investing most often occurs on single family homes, Sperber said, and works best in smaller markets, often returning an interest rate between 4% and 6%.
It’s a strategy Sperber said is a good way for beginner investors to start out if they don’t have deep pockets, too.
The ‘subject to’
“Subject-to” investing is purchasing a property subject to the existing mortgage that is already in place.
Essentially, this is when an investor comes in and makes back payments for a homeowner who is behind on their payments, as opposed to the home falling into foreclosure. The original owner then deeds the property to the investor and moves out — often to downsize into a more affordable living space — while leaving the loan in place and the property under the investor’s ownership.
It’s an investing strategy ideal for investors low on capital, Sperber said, adding that buyers in this situation aren’t formally assuming the loan. The terms of the original note stay the same, including the name in which the loan was purchased. And the buyer takes on the responsibility of making sure the mortgage is paid on time until it’s renovate and resell the property.
An average return for a “subject-to” investment is hard to give, according to Sperber, who said profits could differ greatly depending on expenses at hand.
REITs
Real Estate Investment Trusts, or REITs, are companies that own, operate, or finance income-producing real estate ventures. And investing in them can be a good way for rookie investors to create passive income from real estate.
Publicly traded REITs offer investors a liquid way to invest in real estate without having to buy or manage property themselves, Insider previously reported.
So instead of owning individual buildings, REITs allow investors to make investments in a mutual-fund-style model.
As of the first quarter of 2021, the average 25-year return for private commercial real estate properties held for investment purposes was 10.3%, outperforming the S&P 500 Index’s 9.6%, according to the National Council of Real Estate Investment Fiduciaries (NCREIF). Residential real estate investments averaged a return of 10.3% as well, according to Investopedia.
Investors can find value if they know where to look for it. Jussi Askola, the president of the boutique investment-research firm Leonberg Capital, told Insider in November that the REITs with the most potential during the 2020 economic downturn included those within the apartment, mobile-home, and manufactured-home sectors. REITs with properties appropriate for industrial or e-commerce use could do well too, he said.