Investing in real estate is a fairly well-known idea, but have you heard of passive real estate investing? If you don’t want the responsibilities of a landlord or have limited cash to invest, then passive real estate investing may be worth exploring. But not all real estate investing is truly passive, so your first move as investor is to fully understand passive investing in real estate.
Passive real estate investing can create the ability for individuals to invest in real estate and earn passive income without the stress, physical labor or time constraint of managing the real estate property. In this article, we’ll be looking at everything about passive real estate investing, passive management and earning passive income.
What is passive investing in real estate?
Passive real estate investing is a strategy that provides direct exposure to real estate without incurring an obligation to actively manage an investment property or real asset. Passive investors in real estate may or may not own real estate directly or indirectly through a variety of ownership structures or investment vehicles.
Real estate is a popular asset class for investors because rental income can generate long-term passive income streams that are relatively stable. People who invest passively may receive somewhat lower returns in comparison to active investors, who perform all the work themselves in lieu of paying property or investment management fees.
Passive investors in real estate may never see the investment properties they own, as it is a remote ownership. Property management companies and other professional companies oversee the finer details of real estate ownership, leaving passive investors to focus on the fundamentals of the rental property as an investment.
Types of real estate investing
Real estate investment can be classified into two primary categories: active and passive. When you think about a real estate investor, you might picture someone who owns rental properties, takes care of tenant management, collects rental income, handles maintenance requests, and so on.
This example is someone that is an active investor. By contrast, passive real estate investing is where the investor doesn’t work in any of their investments but yet earns passive income. When you buy Apple stock, you don’t automatically work for Apple. Stocks are a passive investment.
Similarly, you can purchase real estate in the same way. Therefore, active investing means you actively work in your investment. Passive investing means you contribute capital but minimal to no work other than finding the right investment opportunities.
Nowadays, investing passively is as simple as joining a real estate syndication. Real estate syndications are groups of real estate investors who partner to make a more significant real estate purchase than they could individually.
For example, a 350-unit apartment building might be hundreds of millions of dollars. Either one person could buy that, or a syndicator could bring passive investors together to create a syndicate, and then each take a proportional percentage of the profits.
Syndications have two types of partners: general and limited. General partners are the ones that put together the deal, and limited partners are the passive investors. They invest capital upfront and receive regular payments on their investment. A passive investor can write a check and enjoy the investment returns, which can be substantial for real estate deals.
Another benefit is that you do not have to be an expert on real estate. However, actively investing would require you to thoroughly understand the market and how to identify which deals are good and which ones won’t make money.
That’s hard to do, especially if you have a full-time job. With passive investing, you don’t need to be an expert in real estate — all you need to do is find a quality investment opportunity from the right investment team that does.
Passive real estate investing may not be right for every investor. Opting for passive real estate investing involves giving up a substantial degree of authority concerning matters such as renovation strategies, leasing policies, the employment process, and other aspects.
If you have the knowledge, skills, and the necessary time to actively acquire and manage real estate properties, it might be more beneficial for you to be an active real estate investor rather than adopting a passive approach.
Furthermore, participating in passive real estate investing via a real estate syndication may come with a financial threshold that is not suitable for all. In these types of investment arrangements, the minimal necessary investment could be as substantial as $25,000, which could pose challenges for an inexperienced investor.
Once you find a real estate syndication company that you like, know, and trust, here’s the process you would go through as a passive investor:
- You’ll receive information from the syndication team about an investment opportunity.
- After reviewing this information, you’ll typically visit the offering page with the investor documents (Private Place
- Once you’ve submitted your documents, you’ll receive the instructions to wire your funds.
- Upon closing of the deal, you’ll receive quarterly or monthly updates and financials on the project. You’ll also receive regular distributions, which are your share of the profits.
At the end of the year, all limited partners receive a K-1 to file with their taxes to take advantage of the tax advantages of real estate such as depreciation.
Passive vs. Active Real Estate Investing
Investors may perceive that all real estate income is “passive,” as even direct owners of real estate enjoy some of the same benefits as passive investors. Both active and passive investors have the responsibility to thoroughly research a rental property before investing. Active and passive real estate investing have some key differences:
Active real estate investing
- Directly owning real estate requires significant upfront work and investment, with income streams from reliable tenants becoming more passively earned over time.
- Completing a purchase may also involve a lifestyle change.
- Active real estate investing can be a full-time job. Some active investors “flip”—buy, fix, and sell—real estate as their occupation. Passive investing in real estate provides a truly passive income stream, enabling investors to hold any occupation.
Passive real estate investing
- Requires primarily only investment capital.
- Passive investors in real estate never assume any landlord responsibilities. Instead, passive investors rely on professional property managers to actively manage tenants and maintain the rental properties.
- Passive investing is generally more liquid. Passive investors can trade in and out of real estate positions, usually with few restrictions, while active investors may be obligated to sell a property outright to liquidate.
Comparing active Vs passive investing
- Significant time needed requires an active approach, not a passive one.
- Landlord duties also require an active approach not a passive one.
- Low minimum investment is rather not active but passive.
- Improved Liquidity is also not active but passive.
- To be 100% online also means it’s active not passive.
Ways to passively invest in real estate.
Investors interested in passive real estate investment have several options. Some ways for making passive investments in real estate are explained as:
- In terms of ownership structure, real estate investment trusts are considered indirect, moderately liquid, and typically hold a substantial portion of their assets in shares.
- Real estate funds are similarly indirect, exhibit varying levels of liquidity, and represent a portion of their value in shares.
- Crowdfunded real estate is relatively straightforward or direct, less in liquidity, and has a substantial value attributed to shares.
- Tokenized real estate is also direct, high in liquidity and considered as tokens in terms of assets. Tokenized real estate is similarly direct, characterized by strong liquidity, and categorized as tokens within the value of assets.
Real estate investment trusts
A real estate investment trust (REIT) is a financial vehicle established to offer real estate investors dividends sourced from rental income. Investors in passive real estate can obtain REIT shares in a manner akin to buying publicly traded stocks on the stock market.
These trusts are compelled by the Securities and Exchange Commission to distribute at least 90% of their taxable income as dividends to their investors. REITs are professionally managed by teams that include property management company, investment fund managers, and other investors, meaning that investors can use REITs to gain totally passive exposure to real estate market and real estate investing.
Investors can choose which REITs to invest in, but don’t have the flexibility to select specific real estate investments. REIT portfolio managers choose and manage individual properties, which can range from large apartment buildings to industrial facilities to single-family home or multifamily properties. Investors are more likely to invest in high-quality commercial real estate properties rather than private residential real estate or other investment opportunities.
Real estate funds
Real estate funds are investment collections primarily focused on real estate venture. This real estate investment portfolio, which might include investments in REITs, is typically organized as either exchange-traded funds (ETFs) or mutual funds.
Investors who prefer passive real estate investment have the option to incorporate one or more real estate funds into their investment portfolios without the obligation of getting actively involved in day to day management of tangible property assets.
Real estate funds themselves can be actively or passively managed, with actively managed funds generally charging higher fees. A passive investment fund may follow a real estate index like the Dow Jones U.S. Real Estate Index, while the real estate investments of actively managed funds are directed by financial professionals.
Another choice for real estate investors is a real estate-centred private equity fund. Participating in a private equity fund can yield appealing profits, yet the initial capital demand, usually exceeding $100,000, can be a barrier for numerous investors. Private equity investors also typically pay management and performance fees to professional investment teams.
Real estate crowdfunding
A few ways passive investors can gain real estate portfolio exposure is by investing in crowdfunded real estate passively, which can range from multifamily housing to commercial and industrial properties. Crowdfunded real estate is real estate that’s been fractionalized—virtually divided into small portions that are funded by “crowds” of investors.
Investors in crowdfunded real estate can evaluate specific properties for investment, and directly own portions of real estate assets including commercial real estate. Crowdfunding platforms work directly with real estate sponsors, who are like the property manager that’s responsible for the active management of the property.
Traditional crowdfunding platforms fully control the relationship between real estate sponsors and investors. Investors using these online platforms should do their own due diligence to check and trust that the crowdfunding platform is conducting itself correctly.
Tokenized real estate
Another option for passive real estate investors is to buy tokenized real estate. Real estate that’s tokenized is generally also fractionalized and uses blockchain technology to optimize the investment process. Investors in tokenized real estate directly own portions of specific properties, with real estate tokens representing their ownership stakes.
Blockchain technology can improve many aspects of the real estate investment process, making it easier for investors to engage in passive real estate investing. Blockchain tech can improve the transparency, efficiency, and security of real estate investing, and ensure that private fund or platform managers don’t exert too much control over investors’ holdings.
Real estate tokenization platforms sometimes leverage blockchain technology to support both real estate sponsors and investors, enabling more direct and useful interactions. Passive investors still need to do their own due diligence before investing but can use real estate tokens for other investments to generate income and boost cash flow.
Pros and cons of passive real estate investing
Investing passively in real estate has both advantages and disadvantages. Here are some of the major pros and cons for this investing approach:
- No landlord duties: Investors in passive real estate investments only provide investment capital, rather than engaging in the operations, physical labor, and maintenance of a property.
- Opportunities to easily diversify portfolio: Investors can gain exposure to multiple properties by using one or several passive investment strategies for passive income.
- Access to affordable investments: Passive investors frequently have access to fractionalized ownership opportunities, which can make real estate investing affordable for more investors.
- Less control over investments: People who take part in passive real estate investing generally exercise less control over their real estate investments. Depending on the investment strategy, investors may not be able to choose specific investments or make investment decisions.
- Potentially higher fees: Passive investors typically pay investment or property management fees for the convenience of passively investing. An investor’s fees can vary greatly depending on their strategy and the property management company.
- No physical ownership: Passive investors don’t physically own any property, so they can’t rely on their real estate investments if they need somewhere to live in an emergency. They only get passive income in the form of passive real estate income streams.
How to start passive real estate investments
You might be curious about how to start passive real estate investing to enjoy some tax benefits. Well, there are numerous investment strategies at your disposal, and you can initiate your investment path by following these steps.
- Assess your current portfolio: What asset classes are you currently holding? Your first step is to evaluate your current investments, including any passive or active real estate investments that you may have already. Review both the composition and performance of your current investment portfolio.
- Determine your investment goals: As a passive real estate investor, what are your goals? Your second step is to determine your major investment priorities. You may be focused on maximizing your short-term passive income or might be more interested in long-term capital appreciation. However, taxes or investment fees may raise concerns for some investors.
- Develop an investment strategy: Your next step is to develop a specific strategy for passive real estate investing. You need to decide how exactly to invest in real estate, and then select specific investment funds or opportunities to execute on that strategy. Ample research is required to complete this phase.
- Execute the investment strategy: Whenever you are ready, you can initiate and complete the relevant transactions to implement your investment strategy. You may use one or more platforms or brokerages in this step, depending on your investment approach.
- Monitor your real estate portfolio: After you’ve integrated one or more real estate investments into your portfolio, your responsibilities as a passive investor are largely concluded. You can observe the performance of your assets and make any essential adjustments to your investment portfolio as needed.
Is passive real estate investing right for you?
Passive real estate investing can be appealing to investors who don’t want the many responsibilities associated with property management. Passive income streams from real estate can be reliable, even in volatile markets, over long periods of time.
Investors who choose passive real estate investments may pay for the convenience by accruing lower returns and likely won’t get the same tax benefits as others. Each investor should conduct their individual research when formulating an investment strategy because it’s crucial to follow an investment approach that aligns with your specific requirements.
As demonstrated, the most demanding part of engaging in passive real estate investing lies in the selection of a skilled investment team. With that, and after signing and funding, a passive real estate investor will have little involvement. To sum it up, if you aim to achieve a satisfactory financial return without engaging in the responsibilities of property ownership, a passive real estate investment could be the ideal option for you.
Passive real estate investing and wealth
Making money with minimal daily effort sounds like a sweet deal. The idea of letting your money work for you while you continue to earn passive income can be a reality with the right financial decisions. Asides trading stocks, looking at bonds, and the other popular investment options, there are lesser known strategies that involve you maximizing non-investment financial vehicles like your whole life insurance policy.
With a whole life insurance policy, you can use the cash value component to generate cash flow and settle your needs while still enjoying the benefits that come with the policy.