Do you wish you could make money from real estate investments without doing the work, risk, and headaches?
As a real estate investor for more than half my life, I’ve often wondered what life would be like without worrying about tenants, maintenance, or collecting rent. Wouldn’t it be nice to realize the benefits of real estate without phone calls at 1 am about problems you can’t fix at 1 am?
Passive real estate investing is a strategy that allows owners to hand over property management while still making money.
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My Experience With Real Estate
Active real estate investing is what allowed my family to retire young. But before retiring at 42, my career was in Financial Services as a Chartered Financial Analyst.
In one of my roles, I recommended which passive real estate investment products could be bought or sold by Financial Advisors. I have expertise with both active and passive real estate investments.
What Is Passive Real Estate Investing?
Passive real estate investing is a strategy that allows investors to generate income from real estate holdings without actively managing them.
This type of investing typically involves giving money to someone else who will do all the work for you, such as a real estate investment trust (REIT) or a real estate crowdfunding platform.
Passive real estate investing can be done through indirect investments or directly. This type of investment typically requires minimal management or effort from the investor once the initial purchase is made. A professional team handles most of the work involved in managing the property.
Passive real estate investing is often attractive to those who do not want to become involved in a property’s day-to-day maintenance and operations.
What Is Active Real Estate Investing
Active real estate investing involves overseeing the management of the building, including finding tenants, renting the units, and maintaining the structure.
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Investors generally spend much time researching suitable real estate options to purchase a property. Then they must apply for a mortgage with a bank or another financial institution and pay a significant down payment up-front.
After acquiring the property, investors must deal with ongoing bill payments, maintenance costs, renovations, and property taxes. Owners who are renovating and eventually house flipping are typically very hands-on.
Active real estate investing requires a significant investment of time and energy. The upside to being an active investor is that you can control the business model and implement the Buy, Rehab, Rent, Refinance, Repeat (BRRRR) strategy to force appreciation.
Why Consider Passive Real Estate Investing
Not all real estate investors have experience with renting properties, maintenance, the legalities with evicting tenants, etc., that comes with active investing. When you hire a property management company, you pay experts to take care of everything.
Another benefit of passive real estate investing is that you can own property remotely. Hiring a property management company to take care of real estate on your behalf means you don’t have to be in the property’s exact location.
Remotely owning a property allows investors to take advantage of purchasing properties in high-demand areas from a distance without an active management role.
Other Options for Passive Real Estate Investing
Other than hiring a team of experts at a property management company to take care of active real estate management, other passive real estate management options are available for investors.
1. Real Estate Investment Trusts (REITs)
A real estate investment trust is a company that owns, operates, or finances income-producing real estate. A real estate investment trust allows people to invest without buying or managing the property. A REIT owns a basket of assets, with pooled capital from several investors to purchase properties. Rather than rental income, investors or unitholders receive a distribution, usually monthly or quarterly, which is taxable.
REITs can own several commercial property types, such as office and apartment buildings, hospitals, shopping malls, warehouses, hotels, and commercial forests. Many different and more focused REITs are available for investors, such as healthcare REITs and industrial and retail REITs, to name a few.
REITs can trade publicly on major stock exchanges, like stocks and exchange-traded funds. They are also public non-listed REITs, and private REITs. But publicly traded REITs are the most common way people invest in real estate.
Although publicly traded REITs aren’t especially risky investments, the returns won’t be as high as other types of investments. REITs are a good source of a steady income and should be a long-term investment that gradually benefits from the property collection’s appreciation.
However, they are liquid, so they can be bought and sold on the exchange at any time, and investors also benefit from the diversification REITs offer in their portfolios.
2. Real Estate Crowdfunding
Real estate crowdfunding consists of pooling resources using financial technology with other investors. Roofstock One is a popular crowdfunding option for single-family investing. Developers or other real estate professionals then purchase the property with the pooled funds.
The property can be a new house, a commercial building (retail, office space, a hotel, etc.), an apartment complex, or even just acres of land. Using pooled funds allows both the developers and investors to benefit from being able to purchase more costly real estate than they could have bought on their own. The real estate is then separated into units and divided amongst the investors.
The minimum investment is generally a few hundred dollars, and much of the money goes into REITs. However, these funds sit in private holding companies, unlike publicly traded REITs. Privately held REITs tend to be riskier investments but come with higher returns.
Real estate crowdfunding is open to all investors. Some platforms may require investors to meet specific income and net worth guidelines, which may create a barrier. Investors must do some work and thoroughly research the properties before diving in. Like many investments, there is a risk, so make sure you have enough money to play with.
Crowdfunded real estate allows investors to have a balanced portfolio by adding further diversification. There is a minimal ongoing investment, and the returns in the form of dividends can be larger than traditional real estate investments.
Some drawbacks of crowdfunding are that investors can’t quickly sell their assets, there can be some management fees, and investors must pay taxes on the dividends they receive.
3. Real Estate Funds
Similar to REITs, real estate funds are securities that allow investors to add real estate to their portfolios without acquiring the properties. One difference is that a REIT is a single company that owns and operates the real estate, whereas a real estate fund is a pooled investment, typically a mutual fund.
A real estate fund is another type of sector fund, like equity funds, technology funds, oil and gas funds, etc. REITs often make up a significant portion of the securities in a real estate fund.
One reason you may prefer to invest in real estate funds over REITs is the diversification. Like any other mutual fund, a real estate fund comprises several companies, whereas a REIT is a single company. But if you prefer to understand how one company performs and operates, then a REIT is more suitable.
The tax treatment for REITs and real estate funds is similar in that the dividends they pay out are taxable, as well as any capital gains for securities sold at a profit.
4. Partner With Other Investors
Unlike investing in REITs, real estate crowdfunding, and real estate funds where there is no actual property ownership, buying a property with other investors does involve owning part of the property.
Investors who prefer not to take on an active role can negotiate a partnership with others who choose to be hands-on. It may involve an agreement where the passive investor pays the partners for managing the real estate, but they would still have part ownership of the property.
The Downsides of Passive Real Estate Investing
1. Lack of Control
Although earning an income through passive real estate investing sounds great when you can be hands-off, you are handing complete control over to a management team. It can be challenging to leave your hard-earned money with other people and have complete trust in them.
2. Lower Returns
Hiring a property management company can be expensive, so the returns are less than if you were to manage your property actively.
3. Risky Investments
With investments like REITs and real estate funds, there is always an element of risk involved. Investors can lose the entire principal if the value of the investment declines. Factors that can lead to a loss include a general downturn in the market or issues with an underlying asset in the funds.
If you want to buy real estate without the hassle of owning a property, then investing in REITs, crowdfunding, real estate funds, and partnering with other investors is worth investigating.
Although the goal is to earn passive income, all investments require due diligence and research before committing. Another benefit to these passive income investments is they remove barriers to entry, such as qualifying for mortgages and large down payments.
Hiring a team to manage your property costs money, so you will earn lower profits than managing the property yourself. But if you value your time, energy, and peace of mind more than the extra money, passive real estate investing is the route you should consider for future real estate investment opportunities.
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Greg is a Chartered Financial Analyst (CFA) with 22+ years experience in Financial Services. He has held numerous FINRA Securities licenses (series 7, 63, 65, and 66), and is an expert on Investment Products and Financial Planning. Greg has 22+ years experience as a real estate investor and degrees in Psychology and Philosophy.
Greg has been quoted/interviewed in Yahoo Money, Yahoo Finance, USA Today, Authority Magazine, Realtor.com, Business Insider, and others.
Greg is an avid runner, and the father to identical twin girls and their awesome brother. His love of budgeting and his kids led him to join The Great Resignation in 2021.
Disclaimer: Any Financial Tips on ChaChingQueen are general and informational. Speak with a professional about your specific situation.