Nobody wants to work forever, which is exactly why everyone is obsessed with the idea of passive investment. And when you search Google for the “best passive income ideas,” real estate investment always makes it to the top 5.
But interestingly, a recent report has shown a 45% decline in home purchases last year. So why the gap between interest and actual investing?
Many people assume investing in real estate only means becoming a landlord or flipping houses. While these methods can be highly profitable, they can also be expensive, stressful, and time-consuming. Luckily, direct ownership isn’t the only way to profit from real estate.
Passive real estate investing allows you to invest in real estate and earn fairly steady profits without the hassle of property management. You just sit back while the returns roll in.
Interesting, isn’t it? While passive real estate strategies offer more free time and a path to financial freedom, they still do require some effort upfront. This article will cover everything you need to know about passive real estate investing and how to get started quickly.
Keep reading to learn how you can achieve financial freedom effortlessly through passive real estate investing.
Passive real estate investing offers steady profits from properties without the hassle of day-to-day management. It offers lower control but higher diversification and accessibility than owning rentals directly.
There are various passive vehicles to choose from, like REITs, real estate funds, limited partnerships, and crowdfunding platforms, each with different benefits and risks.
Choosing between active and passive investing strategies depends on your personal goals, risk tolerance, and investment capacity.
- Passive real estate investing ensures steady profits without daily property management.
- It offers lower control but higher diversification through REITs, funds, partnerships, and crowdfunding.
- Types of passive investments include REITs, real estate mutual funds, crowdfunding, and limited partnerships.
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What Is Passive Real Estate Investing And How Does It Work?
Passive real estate investment is an approach for those who wish to invest in real estate but don’t want the hassle of managing properties every day.
How does it work? Basically, you put your money into a real estate project. Then a third party, such as a property management company, an investment platform or a syndicator takes care of all the operational aspects. They deal with tenants, take care of maintenance, and sort out any other management stuff.
You become a silent partner instead of an active landlord. Your main job is to provide the funding. In exchange, you make money from the multifamily property, either through dividends, rental income, or the appreciation of the property’s value over time.
Passive investing also extends to passive commercial real estate investing that allows you to be part of bigger deals. This includes properties like apartment buildings, shopping malls, office spaces, warehouses, and industrial buildings. For instance, platforms like SparkRental enable both accredited and non-accredited investors to start with relatively small amounts to invest in major commercial developments.
Passive vs. Active Investing
Real estate investing primarily revolves around two approaches: active and passive strategies. Both have the potential for profit through property appreciation and rental income, yet they vary in terms of involvement and risk.
Let’s take a closer look so you can better choose which real estate strategy works best with your situation and financial goals.
Active Real Estate Investing
Active real estate investing refers to directly purchasing, owning, and managing properties yourself, whether single-family homes or multi-unit apartment complexes.
As the landlord and owner-operator, you handle sourcing acquisitions, securing funds, overseeing renovations, screening tenants, addressing maintenance issues, and collecting rents. It needs a lot of money and effort, but you get total control and keep all the profits.
Passive Real Estate Investing
While this hands-off method means giving up direct control, it’s also an effective way to diversify your investment portfolio from commercial properties to residential apartments in various locations.
What is active real estate investing with passive management
Can’t decide between the two strategies? You can have the best of both worlds with active real estate investing and passive management. This strategy combines hands-on property selection with hands-off daily management.
Here’s the deal: you get to pick and buy the properties you want – could be a cozy house or a big commercial building. But once that’s done, you hand over the day-to-day responsibilities, like tenant management and maintenance, to a property management company.
But keep in mind that while it can lead to higher returns than passive investing, hiring a property management company costs money and affects your profits. Also, how well they manage your property will impact your investment’s success.
Types of Passive Real Estate Investments
If passive investing appeals to you, here’s a rundown of some of the most popular types you can explore.
1. Real Estate Investment Trusts (REITs):
REITs are companies that own, operate, or finance income-producing real estate. Think of them as stocks for real estate – you can buy their shares on the stock market just like you would with any company.
When you invest in a REIT, you regularly receive dividend payments. This is because REITs must give at least 90% of their taxable income to shareholders as dividends. By doing this, REITs don’t have to pay corporate tax anymore.
There are also private REITs and non-traded REITs, which have more risks due to a lack of liquidity and transparency. But publicly traded REITs are a safer and more transparent option for investors. They offer easier access to the real estate market and the potential for more consistent returns.
Advantages of REITs:
Liquidity: Shares of publicly traded REITs can be bought and sold on major stock exchanges.
Steady Income: REITs pay dividends, which is a nice way to earn a steady income.
Accessibility: REITs offer a lower entry point for investment.
2. Real Estate Mutual Funds
These are mutual funds that specifically invest in stocks of public real estate companies, including REITs. Real estate mutual funds are managed by professional fund managers, who decide which stocks to buy or sell, based on research, market trends, and the fund’s investment objectives.
Advantages of Real Estate Mutual Funds:
Diversification: Unlike REITs, real estate mutual funds offer broader diversification, as they invest in various types of properties, including commercial, residential, and industrial real estate.
Professional Management: Fund managers use their expertise to select investments and manage the portfolio, which can be advantageous for investors who lack the time or knowledge to do so themselves.
Real estate crowdfunding platforms allow a group of real estate investors to pool their money together and invest in real estate projects online. It’s a way to access larger real estate investments with smaller individual capital.
These platforms often have lower minimum investment requirements compared to traditional real estate investing, sometimes starting as low as $10. Each investment opportunity on these platforms is typically well-documented, providing details about the project, expected returns, time frames, and risk factors.
Crowdfunding is becoming increasingly popular through the years, thanks to advancements in technology. Vantage Market Research expects the global real estate crowdfunding market to expand to a value of USD 161.8 Billion by 2030.
Advantages of Crowdfunding
Accessibility: Online crowdfunding platforms are easily accessible from anywhere with an internet connection.
Diversification: Investors can diversify their investments across multiple projects and geographical areas.
Direct Investment in Specific Projects: Crowdfunding lets you choose specific projects you want to fund.
Transparency: Detailed information about each project is available.
4. Limited Partnerships
A limited partnership in real estate is a form of investment where investors, known as limited partners, provide capital to a real estate project but are not involved in the day-to-day management of the investment. The partnership is managed by a general partner, who oversees the property’s management, development, or renovation.
Profits from the investment, such as rental income or gains from property sales, are distributed to the limited partners, typically based on the proportion of their investment.
Advantages of Limited Partnerships:
Limited Liability: The liability of limited partners is generally restricted to the amount of their investment.
Potential for Higher Returns: Limited partnerships often have a profit-sharing arrangement where investors receive a proportionate share of the profits. Since these profits can be substantial in successful projects, your potential returns can be higher compared to passive investments like REITs or mutual funds.
Tax Advantages: Real estate limited partnerships can offer tax benefits, such as deductions for depreciation and expenses, which can increase the overall profitability of the investment.
Risks and Challenges of Passive Real Estate Investing
Passive real estate investing sounds great, but it’s not without its risks and challenges.
Be prepared for market unpredictability, which can affect your investment value and income. REITs and mutual funds fluctuate with the market, and their success heavily relies on the management team’s expertise.
Another risk is associated with liquidity, especially in investments like limited partnerships or certain crowdfunding projects, where your money can be tied up for a longer period without the option for quick withdrawal.
In crowdfunding, the risk is project-specific. Your investment’s success depends on the particular real estate project’s performance, which can vary widely. There’s also a higher risk of fraud or mismanagement in less regulated platforms.
As for limited partnerships, they often require a larger capital, and there’s a risk of limited liquidity and dependence on the general partner’s management skills.
Despite these risks, with careful planning, passive real estate can be a valuable addition to your portfolio.
How to Get Started with Passive Real Estate Investing
Getting started with passive real estate investing can be straightforward if you follow these steps:
Define Your Investment Goals
Start by clearly identifying your investment goals. Do you want long-term growth, steady income, or a mix of both? This will guide your choice of investment.
Research Your Options
Explore the different types of passive real estate investments, like the one listed in this article. Understand the risks and benefits of each to see what aligns with your goals. Your choice should be based on how much risk you’re comfortable with, how long you’re willing to have your money invested, and what kind of returns you’re looking for.
Assess Your Financial Capacity
Decide how much you’re willing to invest. Remember, some passive real estate investments can be started with a small amount of capital, while others might require more.
Expand Your Network
Start by connecting with experienced investors and industry experts. This helps you learn more about the market and discover new investment opportunities. Join real estate groups, attend workshops, and participate in online forums to meet people in the industry and gain insights.
One easy entry point is joining SparkRental’s online investing club. With an investment as low as $5,000 you can become a limited partner in a handpicked real estate syndication deal.
SparkRental offers more than just investment opportunities. It connects you with members with similar investment goals for support and motivation. This way, you’ll have an accountability partner to mutually push each other towards achieving your goals more quickly.
Passive real estate investing offers something for everyone. But the first step is looking inward to define what “something” really means to you. Setting clear goals and conducting an honest self-assessment of your resources prevents putting effort into plans that aren’t feasible.
Choosing the right passive real estate investments becomes a lot simpler when you have clear goals from the beginning. Once you figure out your budget and goals, you can join investment clubs, like SparkRental, to help you get started on your investment journey.
Passive Real Estate Investing FAQs
What is the most passive real estate investment?
Real estate investment trust or REIT is typically the most passive form of real estate investment, where you invest in companies that own and manage properties and earn through dividends.
Is passive real estate investment profitable?
Yes, it can be profitable. Passive investing can generate income through dividends, rental properties, and potential appreciation in property value. But its success depends on market conditions and your choice of investments, so thorough research and diversifying your investments are recommended to mitigate risks.
Is passive investing better than active investing?
It depends on several factors, including your time availability, risk tolerance, investment goals, and level of expertise in real estate. Active investing might suit those who enjoy being hands-on and have the time to manage properties. Passive investing is better for individuals looking for a more hands-off approach, possibly with less risk and a steady income stream.