Real Estate Lending is especially know as buying your own flat or apartment. When talking about it there is often the so-called-advantage that buying real estate will lead to more freedom when people get old. Until today I am personally not convinced of that as I mainly see several disadvantages. But not buying my own property does not mean I do not want to invest into real estate. As you know I love to diversify, which is also the case for real estate lending.
So what is real estate defined as? When talking about with other people it is mainly their own house, apartment or whatever. So spend huge amounts on their personal real estate. In my eyes this is not an investment – it is a liability. It is comparable with investing all your money plus the loan from a bank into one single share or one single P2P platform. Would you invest your whole net wealth into Apple shares or Mintos?
My reasons for not seeing owned properties as an investment
First of all I am really not an expert for real estate. There is no way I would be able to rate a house or apartment, neither along his condition nor his location. It might be possible to study and learn it, but this is nothing I am interested in to use my time for. In my eyes my time is more valueable being invested in other things I am able to earn money with. Anyway, I would need to hire an expert for real estate to get an idea of it, which will one the hand cost me money and on the other hand needs a lot of trust.
Diversifying all of my investments, but investing into one single real estate object in one certain place – does this really fit together? In my eyes it is far away from that. It is more like a contrary investment idea. I am open to start testing investments with a small amount. But buying your own real estate object is always about financing 100k upwards. If the overall net wealth is about 10 mio. this might be possible, but unfortunately I still working on the first million. So, for diversification reasons I cannot invest into without hurting my own rules and putting my wealth at a big risk.
Last, and another big reason is my personal freedom. Buying a house or flat means you are either financially independent from it or you have to take care about it. Both cases are not valid for me. So I would feel bound to it and not free. While working on my freedom, which is at first financially, but secondly also related to the choice where to live, investing into real estate does not fit to my personal life goals.
When you cannot do it, use experts
Also I do not want to buy a house or apartment I see the potential and need of real estate investing. We need somewhere to live, work and go shopping. Therefore it is necessary to have buildings, flats and apartments or even huge shopping malls. And as not every company or inhabitant wants to buy it with a loan, they rent it from companies being specialized on that topic.
There are several ways of how to invest into private or commercial properties without going into personal debt. There is no special share of my net wealth which I want to have invested into this companies, but I am trying to put into a relation with all other assets. For any reason a lot of people do not know the possibilities here. This is why I decided to write this post about my personal three ways to invest into real estate.
#1 Real Estate Lending with REITs
REITs are the short form of Real Estate Investment Trusts. Those companies are usually owning a lot of real estate and managing it with their own experts. Especially in the US and Canada those Trusts are worth several billion dollars. Investing into those kind of companies will generate you a passive income from dividends. Using special tax rules those companies have to pay a huge amount of their annual win to their win.
Especially over here in Europe REITs are more or less unknown. In Germany we rely on the state pension, which is somehow wired. We all know, that this concept does not work any longer without taking responsibility for yourself, but still a lot of people think it will work out for them. Additional in my eyes the government is not supporting long-term investments enough to show people a way out of the potential age poverty.
In the US and Canada REITs are popular for pension investments. The big advantage of REITs are in my eyes:
- you have experts working there
- their portfolio is huge and not concentrated in one place or area
- paying a dividend is mostly the case
- you are able to diversify among different REITs
I use Captrader and degiro to invest into REITs as the costs with most german brokers a pretty high. But you need to have an idea of your strategy before selecting the broker, as you are not able to buy any REITs with all of them. Additionally depending from where you are, you have to be able to select the right data for your taxes. Most of these brokers provide the data but do not automatically transfer the money to your local tax office.
#2 Real Estate Lending with ETF
While chosing the best REITs for your portfolio and you income, an ETF is doing this for you. So again you are using experts to select the right REITs for you in one aggregated funds which makes your money being more diversified. Some time ago I wrote an blogpost about an easy strategy to invest into real estate, which was translated from a german blogger with his permission. There the strategy was to invest into five different ETFs with a total of 200 dividend shares, 300 REITs and about 800 bonds.
I am using this strategy with a german broker. I try to minimize costs while investing, whereas I am paying nothing to buy the shares. Currently I am saving about 40% of my monthly savingsrate to this strategy. By the end of this year I want this portfolio to grow into an important income stream.
From my point of view ETFs are even more easier to use than REITs:
- diversification among a lot of REITs and real estate companies
- easier to invest in from Germany/Europe
- passive management of the assets (done by the ETF team once a year if necessary)
- still 3,5% to 5% of dividend payment possible
Also ETFs are pretty unsexy products especially with property investments they are an interesting alternative. You might start from 25 Euro per month with investing at very low costs. Over the time you are able to increase your investment amount or stop the savings plan – however you like. If you choose the right ETF you will find a nice mixture out of commercial properties and residental projects. So it is pretty easy to diversify, also you have to rely on the ETF management.
#3 Real Estate Lending with P2P lending
Last week we were talking about Real Estate Lending at the finfellas event. Experts from a lot of P2P platforms were talking about different topics out of real estate lending and gave guests and viewers very interesting insights. As especially for smaller companies receiving loans from banks might be worth the work they have to put in, financing loans via crowdfunding and P2P lending became quite popular. There were 10+ platforms from all over Europe presenting their business modell of how to invest into real estate lending.
Bulkestate is mainly publising loans from objects in the Baltics being renovated and modernised. Estateguru does the some, but their loans and investments are spead over Europe. Several UK platforms like Shojin, Kuflink and Ablrate were showing how real estate lending works in the UK and Ireland.
There are a lot of possibilities to invest into this business sector. But again, you would have to register at several platforms and combine their strategies to diversify your P2P portfolio. With EvoEstate and Brickfy there are two P2P platforms who are using this funds-character. The minimum investment into one single property is lower than usually at the platform, which makes it more interesting for investors with smaller amounts.
Development loans and commercial property
There are several P2P platform being specialized in separate areas of real estate investing. Chosing single platforms will make you understand their strategy. Especially platforms with experts from the Baltics are using a development loan to modernize objects in Latvia, Lithuania and Estonia. For example Bulkestate is pretty active here and publishing a lot of development investments.
Additionally you are able to find platforms investing in commercial projects, just like Reinvest24, BitOfProperty or MaxCrowdfund. Often a property is bought with a loan and rented out, which generates investors a monthly rental income. Those projects are secured throught first rank mortgage or longterm contracts. Or sometimes they are owned by the P2P platform itself, when they are rented out. This might be apartments as well as commercial objects, which you will find here.
In the end there will be a lot of chances to earn money. But above those hight interest rates it is useful to watch for your diversification here. Investing anything into one platform (with the highest interest rate) might lead to a poor diversified portfolio. The more you check it, the less risk you will be aware of – in a pretty high-risky-area for investments.
Debt and mortgage loans on residental property
Beside those loans out of commercial interest you also find several loans from financing houses or apartments. People or companies take you loan as a debt to use it for buying some sort of real estate. It is more or less the same if you lend this money from a bank. But with P2P lending there are a lot of lenders financing the project, which might be easier to get it.
Those kind of loans are often secured by mortgage. That means, if the buyer is not able to repay the loan to his lenders those will be able to sell the property to recover their investment.
As this sounds pretty easy to follow there are a lot of investment projects on several platforms. But you have to take care to not overweight those loans in your portfolio. Recovering from a bad debt might take years and your money will be on hold for the whole period. It is great to have experts here being able to take those projects to court, but it will take time.
Crowdfunding and group-buying investments
Imagine to finance yourself one apartment of a hotel somewhere on this world – and receive an interest on it everytime it is rented. This sounds pretty interesting and is a bit like financing commercial projects for rent. Bulkestate offers the possibility to invest via group buying into projects, also it is not their main focus. That is quit reasonable as their popular development loans are easier to finance. Group buying always takes a lot of time and needs several lenders to be finished.
BrikkApp is an example of how to invest into crowdfunding. This platform uses a lot of data from all over the world to rate projects and publish them on their platform. Therewith you are able to diversify all over Europe and lend your money to crowdfunding projects.
How to find the right mixture for me
As everytime all of you are responsible for yourself. At the finfellas event we were talking about the due dilligence on real estate projects. Tanel Orro from Reinvest24 said: “You might make the best due dilligence, but this every investor has to take the risk. No platform is able to carry the risk for their investors”. I absolutely confirm this statement as we as lenders and investors are responsible for our own portfolio and mixture of risk.
I decided to mainly focus on income-generating sources such as REITs, ETFs and P2P lending. Here I am trying to diversify by their net value. ETFs are usually pretty big but generating the lowest return on investment. P2P lending is the interest booster here, whereas REITs are somewhere in the middle.
And this is how I diversified it: I am investing in all of these assets, but most of my money goes into real estate ETFs. Beside that I am also saving on dividend ETFs without any real estate. That is about 60-70% of my savingsrate per month. Just 10% are going into REITs as there are already REITs in my ETF-strategy. And the rest is invested into P2P lending with a 50/50 share for real estate and other loans.
Once per quartile I am trying to re-adjust the amounts depending on my financial statement. Depending on the minimum invest at some platforms the share is sometimes sliding into one direction which has to be adjusted. But that is easy work to do. Therefore it is okay for me.
So, real estate lending and investing is essential for my portfolio. I would never buy a house myself or invest directly into real estate. But of course I want to profit from this sector. I just do not want to do the research myself and rate the projects, whereas I am investing indirect through REITs, ETFs and P2P lending.