Financial Answer Center

There are different ways you can go about investing in rental real estate besides the traditional way of purchasing property. There are also some interesting techniques you can use to unload your investment property. Let's begin by talking about ways you can buy into real estate investments.

Real Estate Investment Trusts

A real estate investment trust, or REIT, is a tax designation for a corporation that takes money from a number of investors and invests in all kinds of commercial and residential properties. The REIT provides professional managers that oversee property acquisitions and maintenance of the properties held in the portfolio.

You can buy stocks of individual REITs, but you may want to consider a REIT mutual fund. It invests in many different types of real estate, diversifies your real estate holdings even more and subsequently reduces your risk. Keep in mind that a REIT mutual fund is still a real estate investment and may carry more risk than other mutual fund investments.

REITs can be ideal for people who lack the financial resources, or those who don't want to take on the responsibility and the burden of owning and managing investment property, but still long to invest in real estate. You can make as small an investment as you like and your risk of loss is limited to your original investment. REITs are securities traded on major stock exchanges.

Limited Partnerships

Another way to buy into real estate is to purchase an interest in a real estate limited partnership. This is where a group of investors get together to buy property as a partnership. A limited partnership is owned by one or more general partners, who oversee the partnership's operations and by one or more limited partners that have no say in the management and operations of the partnership. The word limited means that there's limited liability for limited partners; their risk of loss is limited to their investment. Typically, these partnerships are put together to build shopping centers or low-income housing. The sales pitch is that they have special tax deductions available to developers that are passed through to the investor. But most people aren't in high enough income brackets to take full advantage of the deductions.

Limited partnerships can be purchased through stock brokers. Because they are laden with high sales commissions and management fees, your investment income will be sliced accordingly. Limited partnerships are not liquid. In other words, you will have a very hard time trying to sell your piece of the partnership to a willing buyer at a fair price. In order to get out, you typically will have to wait until the partnership is liquidated.

IMPORTANT NOTE: Real estate limited partnerships lost substantial amounts of money in the recent past, for a variety of reasons, including the impact of changes in federal income tax legislation.

The bright side is that you only stand to lose up to the amount you invest in the partnership. If you are considering investing in a limited partnership, plan on holding the investment at least five years and more like 20 years.

IMPORTANT NOTE: Sometimes limited partnerships require their partners to contribute more money, or capital, to the partnership to keep it running when the properties are not operating profitably enough to cover expenses.

Buying Foreclosed Property

Another option to consider is the foreclosure market. Many of these properties are offered at bargain prices. However, these properties take longer to close and require more stringent borrowing standards than conventional lending. Some of the agencies handling sales of foreclosed property include: the Federal Housing Administration (FHA), the Department of Veterans Affairs (VA), Federal Deposit Insurance Corporation (FDIC) and many local lenders which list their real estate owned (REO) for sale. These properties are typically sold by obtaining a listing of available parcels and by auction or sheriff's sale.