How to Invest in Residential Real Estate Without Becoming a Landlord
Real estate investing

You have to be courageous to put much of your hard-earned retirement portfolio into the stock market, given that earnings are generally stalling and an interest rate hike cycle is just beginning. Moreover, with most bond funds only paying around a 3% annual return, and the majority of hedge funds performing poorly, it's getting more difficult for investors to find the 5% to 8% return they need to meet their retirement goals.

Until a few decades ago, there were few methods of investing in real estate aside from just buying properties yourself or in a partnership. That has changed. Investors can choose from dozens of different real estate-related investments. Investment opportunities in residential real estate, long a second sister to commercial real estate, have also grown, especially in the last few years. 

REITS

A real estate investment trust (REIT) is a firm that owns and develops real estate assets. You buy shares in a publicly traded REIT similar to purchasing an equity. Various REITS specialize in different real estate sectors. Some REITs focus on commercial real estate, such as malls or office buildings; others focus on residential real estate such as apartments or condo developments.

While having a selection of REITs in your portfolio can complement stock and bond funds and mitigate portfolio risk/volatility, it's also important to understand how the real estate fund is designed and how value is derived from its holdings. Remember that the performance of REITs is based on cash flow and profits from selling properties, which is notably different than the factors that drive performance of stock and bond funds.

Although many investment advisors suggest considering real estate as an alternative investment, most suggest keeping it as a relatively small percentage of your portfolio. Mike Papierski, national real estate practice leader at Chicago-based Northern Trust Company, recommended in an article that investors cap real estate exposure in their portfolio at 15%.

Real Estate Investment Partnerships

Real estate investment partnerships can be structured in a variety of ways, including a tenant in common project, as a general partnership, or as a limited liability partnership (LLP) or a limited liability corporation (LLC). Each of these structures has pros and cons, so you should carefully consider your partners and potential liabilities before entering any partnership.

A partnership should have definite arrangements regarding how decisions will be made, and if there will be a managing partner/partners. You should always have a written real estate partnership agreement, preferably drafted with the assistance of an attorney.

A real estate limited liability partnership is often set up with an experienced property manager or real estate developer working as the general partner. Investors are brought in to provide financing for the project, and they all share ownership as limited partners.

Peer-Based Residential Real Estate Platforms

You can also invest in real estate through peer-to-peer lending platforms. Peer-based lending platforms dealing with real estate focused nearly exclusively on commercial properties until a few years ago. Fundrise, a well-known equity crowdfunding platform for real estate, was one of the first firms to offer residential real estate products. They made the call to expand into loans for single family homes after a few successful trials in 2014. SoFi has also recently gotten into the mortgage underwriting game. Remember, however, that most of these P2P home loans are for relatively large amounts to borrowers with excellent credit.

Other peer-based lending platforms focused on residential real estate and mortgages that have launched in the last few years include Elevate (UK), LendInvest (UK), and the platform, Income&.

Many influential commentators in the financial industry argue that the real estate investment sector has matured enough to join stocks, bonds and cash as a fourth asset class. This sea change in advice for investment portfolio design means that real estate should be a component in almost all substantial portfolios.

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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