Whenever you think of “real estate investing,” you might picture home flippers or property owners who oversee rental properties to generate additional income. If you’re interested, you probably realize there’s a lot of opportunity in real estate investing, but it can be a lot of work.
Several low-effort real estate investments can be made passively. Passive real estate investment allows you to make extra cash without spending the time and effort needed for more “active” investment strategies like house flipping. So what does the word “passive” entail, and how does this kind of real estate investing work?
Let’s examine that and cover how to find passive real estate investment opportunities.
What Is Passive Real Estate Investing?
Passive real estate investing is a type of investment strategy where an individual invests in a real estate property but doesn’t actively manage the property themselves. Instead, the investor invests in a real estate investment trust (REIT), real estate mutual fund, or another real estate investment vehicle managed by professionals.
In passive real estate investing, the investor is not responsible for the property’s day-to-day operations, such as maintenance, repairs, or tenant management. Instead, the investor earns returns from the property through rental income, capital appreciation, or both, all while enjoying tax benefits reducing their taxable income.
Passive real estate investing is an attractive option for individuals who want to invest in real estate but lack the time, expertise, or desire to manage a property themselves. It can also diversify an investment portfolio, as real estate often correlates inversely with other asset classes, such as stocks and bonds.
However, it’s important to note that passive real estate investing also comes with risks, such as fluctuations in the real estate market, interest rate changes, and the performance of the underlying property. Therefore, investors should carefully research and evaluate any real estate investment before investing.
Types of Passive Real Estate Investments
There are several types of passive real estate investments, including:
- Real Estate Investment Trusts (REITs): A REIT is a company that owns, operates, or finances income-generating real estate. REITs can be traded on stock exchanges and must distribute at least 90% of their taxable income to shareholders as dividends.
- Real Estate Crowdfunding: This involves pooling funds from multiple investors to invest in real estate projects. Investors can typically invest in specific projects or portfolios of properties, with crowdfunding platforms providing due diligence and management services.
- Syndication: Syndication involves pooling funds from multiple investors to purchase a property, with a lead investor or sponsor managing the investment. The sponsor typically receives a percentage of the profits as compensation for managing the investment.
- Private Equity Real Estate Funds: These funds pool capital from institutional and accredited investors to invest in real estate projects. The fund managers typically charge fees for managing the investments and may also receive a share of the profits.
- Real Estate Limited Partnerships (RELPs): RELPs are similar to syndications in that they involve pooling funds from multiple investors to purchase a property, with a general partner managing the investment. However, RELPs are typically structured as limited partnerships, with limited partners having limited liability for the investment.
- Turnkey Rental Properties: This involves investing in fully renovated and managed rental properties, typically through a company that provides all the necessary services to buy, renovate, and manage the property.
- Real Estate Notes: This involves investing in real estate debt, such as mortgages or trust deeds. Investors can receive regular interest payments and may also have the opportunity to purchase the underlying property at a discount if the borrower defaults on the loan.
What is Active Real Estate Investing With Passive Management?
Active real estate investing with passive management refers to an investment strategy where the investor is actively involved in acquiring and managing real estate assets but outsources the day-to-day management tasks to a third-party property manager or management company.
In this approach, the investor may be involved in selecting and acquiring properties, overseeing renovations or improvements, setting rental rates, and making strategic decisions about the portfolio. However, they delegate the ongoing management responsibilities to a professional property manager responsible for tenant relations, rent collection, maintenance and repairs, and other operational tasks.
Outsourcing these management tasks allows the investor to actively invest in real estate without the time and effort required for hands-on management. This approach can provide the benefits of active real estate investing, such as greater control and potential for higher returns, while offering passive investing advantages, such as reduced workload and more excellent diversification opportunities.
How Are Active And Passive Real Estate Investing Different?
Active and passive real estate investing are different investment strategies with distinct characteristics.
Active real estate investing involves direct ownership and management of a real estate property. This typically involves buying a property, such as a rental property, and managing it yourself or hiring a property management company to handle day-to-day operations, such as leasing, maintenance, and repairs. In this type of investing, the investor has more control over the investment and can make decisions that impact the property’s performance, such as raising the rent or upgrading the property.
On the other hand, passive real estate investing involves investing in a real estate investment vehicle, such as a real estate investment trust (REIT) or a real estate mutual fund. This type of investing does not involve direct ownership or management of a property/s but instead provides exposure to the real estate market through a managed investment vehicle. In this type of investing, the investor has less control over the investment, and professional managers are responsible for managing the fund and making decisions about the property/s.
The key differences between active and passive real estate investing are the level of involvement and control, the investment size, and the level of risk. Active investing requires more time, money, and risk since the investor is directly responsible for the property’s performance. On the other hand, passive investing requires less time and effort but comes with less control.
Overall, active and passive real estate investing can be viable strategies, depending on an individual’s goals, resources, and risk tolerance. However, it’s essential for investors to carefully evaluate their options and make an informed decision that aligns with their investment objectives.
What Are The Benefits And Risks Of Passive Real Estate Investment?
Passive real estate investing offers several important benefits and risks to consider. Here are some of the benefits and risks of investing in passive real estate.
- Diversification: Passive real estate investments can benefit investors, as they are not directly correlated with the stock market. Real estate investments may still generate returns if the stock market performs poorly.
- Passive Income: Passive real estate investing can provide investors with a steady stream of passive income. Many real estate investments, such as REITs, must distribute a significant portion of their profits to shareholders through dividends.
- Professional Management: Passive real estate investments are typically managed by professional real estate management companies, which can give investors access to expertise and resources they may not have.
- Liquidity: Many passive real estate investments, such as REITs and mutual funds, are publicly traded and provide investors with liquidity. This means that investors can buy and sell their investments quickly and easily, unlike an individual property that can take many months to sell.
- Market Risk: Like any investment, passive real estate investments are subject to market risk, meaning their value can fluctuate based on changes in the real estate market.
- Interest Rate Risk: Passive real estate investments can be impacted by changes in interest rates. If interest rates rise, the growth and value of real estate investments can slow or even decline.
- Management Risk: Professional real estate management companies manage passive real estate investments. If the management team is ineffective, it can impact the performance of the investment.
- Concentration Risk: If you’re not careful, passive real estate investments may be concentrated in one geographic area, property type, or industry sector. This can increase the investment risk if economic or other issues affect that particular market.
- Fees: Passive real estate investments are subject to management fees, transaction fees, and other expenses. These fees can impact the overall return on the investment.
Passive real estate investing offers several benefits, including diversification, passive income, professional management, and liquidity. However, there are also risks associated with passive real estate investing, including market risk, interest rate risk, management risk, concentration risk, and fees. Therefore, it’s essential for investors to carefully evaluate the benefits and risks of passive real estate investing and to work with professionals to make informed decisions that align with their investment objectives.
There are several ways to find passive real estate investment opportunities. Here are some methods to consider.
Real Estate Investment Trusts (REITs)
A REIT is a company that owns and manages income-generating real estate, such as apartments, shopping centers, and office buildings. REITs are traded on major stock exchanges, allowing investors to invest in real estate without directly owning property. REITs typically pay dividends to their shareholders, which can provide a steady stream of passive income.
Real Estate Mutual Funds
Real estate mutual funds are investment vehicles that invest in a portfolio of real estate-related assets, such as REITs, companies, and debt. Real estate mutual funds can expose investors to a diversified portfolio of real estate investments, which can help reduce risk.
Real Estate Crowdfunding
Real estate crowdfunding is a relatively new way to invest in real estate. Crowdfunding platforms allow investors to invest in real estate projects with as little as a few thousand dollars. In addition, the platform typically handles investment management, making it a passive investment opportunity.
Private Real Estate Funds
Real estate funds are investment vehicles typically available only to accredited investors. These funds invest in private real estate deals, such as commercial properties, residential properties, and development projects. As a result, private real estate funds can expose investors to higher-risk, higher-return real estate investments.
Real Estate Investment Platforms
Real estate investment platforms like Roofstock allow investors to buy and sell rental properties online. In addition, these platforms typically provide investors access to pre-vetted properties and property management services, making investing in real estate a more passive experience.
How To Get Started With Passive Real Estate Investment
Passive real estate investing can be an attractive option for individuals who want to invest in real estate without the time, expertise, or desire to manage a property themselves. However, picking a suitable passive real estate investment requires careful evaluation of your goals and understanding the various available real estate investment options.
Here are some steps to get started with passive real estate investing.
Define Your Investment Goals
Start by defining your investment goals, such as the level of risk you are willing to take, the return you are looking for, and the length of time you plan to hold the investment. This will help you select the right real estate investment vehicle that aligns with your objectives.
Research Real Estate Investment Options
Once you have defined your investment goals, research different options, such as real estate investment trusts (REITs), mutual funds, and real estate crowdfunding platforms. Learn about the investment’s management structure, fees, track record, and associated risks.
Evaluate The Potential Returns
Assess each investment option’s potential returns and risks to determine which aligns best with your goals. Evaluate historical performance, future growth prospects, and dividend yields. Consider consulting with a financial advisor or real estate investment professional to gain insight into the investment opportunities.
Invest In a Real Estate Investment Vehicle
Once you have evaluated your options, select a real estate investment vehicle and invest your funds. This may involve opening an investment account with a broker or investment platform, selecting a mutual fund or REIT, or participating in a real estate crowdfunding campaign.
Monitor Your Investment
Monitor your investment regularly after investing in a real estate investment vehicle. Keep track of the investment’s performance, dividend payouts, and any changes in the market that may impact the investment’s value. In addition, stay informed about the investment’s management team and make adjustments as necessary to ensure that it aligns with your investment goals.
In summary, getting started with passive real estate investing involves defining your investment goals, researching different investment options, evaluating the potential returns and risks, investing in a real estate investment vehicle, and monitoring your investment regularly. Then, do your due diligence and work with professionals to make informed decisions that align with your investment objectives.
How To Determine If Passive Real Estate Investment Is the Right Option For You
Here are some factors to consider when determining if passive real estate investment is the right option for you:
- Investment Objectives: Start by defining your investment goals, such as the level of risk you are willing to take, the return you are looking for, and the length of time you plan to hold the investment. Passive real estate investing can be a good option if you seek a long-term investment that can provide stable income and equity growth through capital appreciation.
- Time commitment: Consider how much time you can commit to managing a real estate investment. Passive real estate investing can be a good option if you lack the time or expertise to manage a property.
- Risk tolerance: Evaluate your risk tolerance and determine if you are comfortable with the risks associated with passive real estate investing. While passive real estate investing can provide stable returns, risks such as market volatility and interest rate fluctuations are still associated with the investment.
- Diversification: Consider if you want to diversify your investment portfolio. Passive real estate investing can provide the benefit of diversification, as it is not directly correlated with the stock market.
- Investment amount: Evaluate how much money you have available to invest. Passive real estate investing can be a good option if you have less capital, as some real estate investment vehicles, such as real estate mutual funds, have lower minimum investment requirements.
- Real estate market conditions: Evaluate the current real estate market conditions and determine if they are favorable for passive real estate investing. Real estate market conditions, such as interest and vacancy rates, can impact the performance of real estate investments.
When determining if passive real estate investing is right, consider your investment goals, time commitment, risk tolerance, desire for diversification, investment amount, and real estate market conditions. Passive real estate investing can be a good option for individuals looking for a long-term, stable investment who need more time or expertise to manage a property. When determining if passive real estate investing is right for you, consider your investment goals, time commitment, risk tolerance, desire for diversification, investment amount, and real estate market conditions. Passive real estate investing can be a good option for individuals looking for a long-term, stable investment who need more time or expertise to manage a property.
Contact RSN Property Group today to learn more about Passive Real Estate Services and how we can help you achieve your investment goals. Let’s work together to create a successful future for your property portfolio.
Although investing in real estate can benefit investors, only some have the time or experience to manage a rental property. Those who want to do something other than labor-intensive work might start with real estate revenue through passive real estate investing. Finding one that works for you only requires study because it comes in many ways!
Frequently Asked Questions
There is no one-size-fits-all answer to which type of real estate investment is the most profitable. Instead, the profitability of a real estate investment depends on several factors, including the location, property type, market conditions, and the investor’s investment strategy.
REITs (Real Estate Investment Trusts) can be a good option for passive income because they are designed to generate income from their real estate holdings and distribute that income to their shareholders through dividends. This can provide investors with a steady income stream without directly owning or managing real estate assets.
Reed Goossens is an Australian-born real estate entrepreneur, investor, author, public speaker, and an all-around good bloke. Reed got his start in real estate investing back in 2012 when he moved to the US.