1. Real estate investment trusts (REITs)
Real estate investment trusts (REITs) are companies that own, operate, or finance income-producing real estate. They allow everyday people to invest in large-scale real estate projects without having to buy or manage properties directly.
There are three main types of REITs:
- Equity REITs own and manage income-generating properties like apartment buildings, office towers, shopping centers, hotels, and more. They earn revenue primarily through rent and may also cash in on capital gains when properties are sold.
- Mortgage REITs (mREITs) invest in mortgages or mortgage-backed securities instead of properties themselves. Their income comes from the interest earned on these real estate loans.
- Hybrid REITs combine strategies from both equity and mortgage REITs by owning properties and holding mortgage assets, as the name suggests.
REITs offer a relatively hands-off way to invest in real estate while providing passive income. By law, U.S. REITs must pay out at least 90% of their taxable income to shareholders in the form of dividends, which makes them a popular choice for income-focused investors.
However, it’s worth noting that REIT dividends are generally taxed as ordinary income—not at the lower capital gains rate. The average annual dividend yield for publicly traded REITs currently hovers around 4%, though this can vary by sector and market conditions.
2. Real estate mutual funds
Real estate mutual funds are professionally managed investments that primarily buy REITs, real estate operating companies, and real estate-related securities. They offer average investors a cost-effective way to gain exposure to the real estate market without buying any property.
They provide instant diversification across a broad range of real estate assets, like commercial, residential, industrial, and specialized sectors, offering more variety than investing in a single REIT.
Real estate mutual funds tend to perform in line with REITs, though returns can vary based on the fund manager’s strategy and holdings. But because they are professionally managed, these funds often come with higher expenses than REIT ETFs or individual REITs.
3. Real estate exchange-traded funds (ETFs)
Real estate exchange-traded funds (ETFs) are investment funds that track the performance of real estate-focused indexes—primarily by holding equity REITs and related securities. These ETFs are typically passively managed and replicate the returns of a benchmark index like the FTSE Nareit All Equity REITs Index.
By investing in a real estate ETF, shareholders gain broad exposure to the REIT market without needing to analyze or select individual REITs. It’s a simple, low-cost way to diversify across the real estate sector with a single trade. Most real estate ETFs also have lower expense ratios compared to actively managed real estate mutual funds.
4. Real estate crowdfunding
Another way to kickstart your real estate portfolio without footing the whole bill yourself is through crowdfunding. Just like you’d chip in to support a new gadget or a local cause, real estate crowdfunding lets you pool money with other investors to buy into actual properties.
These platforms offer a more hands-on (and tangible) path into real estate investing. You’re not just buying shares in a REIT—you’re helping fund real buildings, with the potential for both rental income and property appreciation.
5. Real estate notes
Real estate notes spell out the terms of a mortgage: How much is owed, when it’s due, and what happens if the borrower doesn’t pay. Investors can buy these notes from banks or other lenders, essentially stepping into the lender’s shoes and collecting the borrower’s payments (plus interest) over time.
It’s a far more hands-off approach than being a landlord. No leaky faucets, no late-night calls, no tenant drama. But it’s not without risk. If the borrower defaults, you could be left holding the bag. Plus, investing in notes usually requires a larger upfront investment than dipping into REITs or real estate mutual funds.
6. Buying a property without buying a first home
Okay, so we’re cheating a bit here. But you don’t need to wait to find your dream home (or your dream deal on a home) to start building wealth through real estate. In fact, buying an investment property while you rent can be a great way of getting your foot in the door, especially if you’re holding out for your “forever home.”
One option with lower overhead than purchasing a home: buying a tract of land. While it’s still a sizable investment, raw land comes with fewer operating costs—no maintenance, no repairs, no utility bills. And since land typically carries a much lower property tax burden than developed real estate, you can afford to hold on to it longer. That patience can pay off with bigger returns down the line.
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