Ask Brian: Can I Invest in Real Estate Without Owning Property?



Ask Brian is a weekly column by Real Estate Expert Brian Kline. If you have questions on real estate investing, DIY, home buying/selling, or other housing inquiries please email your questions to askbrian@realtybiznews.com.

Question from Matt in Overland Park, KS: Hi Brian, I have some of my money invested in a duplex and most of my retirement account is in the stock market. Because the economy has been steadily growing for almost a decade, I’m convinced that a recession is near, although no one seems to have any idea when it will happen. I do enjoy being involved with real estate but right now, I’m leery about buying another property. What do you think I can do to stay active in the market but still minimize my risk?

Answer: Hi Matt. Among the attractions to real estate investing are the many options you have for investing. Obviously, some are riskier than others are and that usually involves how much money you have in the deal and how involved you have to be managing the property. Here are four ideas that minimize your financial risk and time commitment.

Sandwich lease options. Today’s market is influenced by two of the three elements that make this a very powerful strategy. The three important elements are a seller needing a creative solution, a knowledgeable investor capable of putting the deal together, and a tenant/buyer capable of completing the purchase before the lease period expires. Done correctly, the sandwich lease option is a win-win-win scenario for all three parties.

The two elements that are widely available today are tenant/buyers likely to be able to complete the purchase sooner rather than later and knowledgeable investors (you). Less common today are sellers needing a creative sales solution. Still, these sellers always exist in all markets. It could be a landlord that is comfortable with tenants in the house but who wants to be relieved of landlord responsibilities for a few years before completing the sale. Or it could be a seller with very little equity in the house that needs to sell but can’t afford the costs of a traditional sale involving sales commissions. It’s the successful investor that finds these sellers to structure a deal meeting the needs of all parties involved. These deals are appealing because the landlord requirements are minimal. The tenant/buyer assumes most maintenance and repair responsibilities as part of the transition towards becoming the homeowner.

Tax lien investing can be financially lucrative. Many more people would probably do this if it were as simple as opening a savings account. However, it does take some effort to learn the laws and requirements in the state and county you are investing in. So get educated!

Because of the great variation in laws, it’s wise to pick a single location, become knowledgeable about the laws, and stick with that one location. After you master one location’s laws, rules, and regulations, you’ll have confidence picking another area to learn more about. Either one that works very similar to the one you already know or one where you’ll learn new things. It’s difficult calling this a downside but you could end up owning the property if the current owner is unable to pay the back taxes, fees, and interest owed.

Real estate notes are a way to invest without directly owning the property or needing to manage it. But you do have more financial risk. One of the most common ways is by financing a person that is flipping houses. Flips are short term so that you recover your investment and earnings in less than a year. But there are markets where you can finance owner-occupied homes on 10, 20, or 30-year contracts. You can also buy discounted notes from banks and other investors. As always, conduct due diligence to ensure you know what you’re getting into.

Hard money loans typically have a higher rate of return than the notes mentioned above. The ROI (return on investment) varies depending on how much risk you want to take but 10% or 12% isn’t uncommon. There are established businesses that have years of experience making hard money loans. These businesses are usually looking for new investors to join them. Working with an established hard money lender will cut into your rate of return but they should have proven due diligence tools already in place along with policies and other resources.

Matt, there are several other ways to reduce risk when investing in real estate; you might also want to look at Top 8 Ways to Invest in Real Estate Using Other People’s Money.

What do other readers think are good low risk and limited responsibility investment opportunities in today’s market? Please leave your comments.

Our weekly Ask Brian column welcomes questions from readers of all experience levels with residential real estate. Please email your questions or inquiries to askbrian@realtybiznews.com.

Author bio: Brian Kline has been investing in real estate for more than 35 years and writing about real estate investing for 12 years. He also draws upon 30 plus years of business experience including 12 years as a manager at Boeing Aircraft Company. Brian currently lives at Lake Cushman, Washington. A vacation destination, near a national and the Pacific Ocean.