What Is Passive Real Estate Investing And How Does It Work?
Carla Ayers5-minute read
November 24, 2022
When you hear “real estate investing,” you might think of house flippers or property owners managing rental properties for extra cash flow. If you’re interested in investing in real estate but think it sounds like a lot of work, fear not: You always have the option of passive real estate investing.
Passive real estate investing is a great way to earn extra money without the work and attention required for more “active” forms of investment like house flipping. But what exactly does “passive” mean, and how does this type of real estate investing work? Here’s what you need to know.
What Is Passive Investing?
A passive real estate investment doesn’t require extensive effort from the investor to maintain. There are a few ways to invest in real estate passively. These include real estate investment trusts (REITs), crowdfunding opportunities, remote ownership and real estate funds.
With these types of investments, you can make extra income without doing any physical labor or acting as a landlord. Some of these methods, such as investing in a REIT, are similar to investing in mutual funds – meaning you, as the real estate investor, can earn some extra cash on investments without having to buy properties.
Passive Real Estate Investment Vs. Active Real Estate
A few key features differentiate passive real estate investments from more “active” types of investments.
- With active real estate investments, the investor typically owns and manages the property. Passive investors don’t generally deal with properties in person and may never even see the real estate they’ve invested in.
- More responsibilities are associated with active real estate investments. These responsibilities include taking care of property repairs and lease agreements.
- Passive real estate investments offer less control over what you’ve invested in and may not bring the same tax benefits as active real estate investments, but they don’t require much experience to pursue. These types of investments also tend to have better liquidity than active real estate investments.
How To Invest In Real Estate For Passive Income: Tips For Success
Several common investment opportunities can be a good start if you’re new to passive real estate investing. Most methods of passive investment fall into one of these categories: crowdfunding, REITs, real estate funds or remote ownership.
Real estate crowdfunding is exactly as it sounds: With the help of other investors, you can pool your resources to invest in something larger than you might have been able to tackle alone. This method is usually reserved for online using platforms that allow a multitude of users to pool funds and invest indirectly in mortgage loans anywhere in the country.
A great way to collect passive income, real estate crowdfunding is similar in some ways to online platforms that allow users to invest in partial shares of company stocks.
Real estate investment trusts, or REITs, are companies that operate as trusts. They invest in various types of real estate – typically commercial properties – and pay out their profits as shareholder dividends each year.
REITs take care of owning properties and collecting rent, or in some cases, funding mortgages and collecting interest. Investors can make money through REITs by investing in them since they’re usually publicly traded similar to stocks. Many Americans invest in REITs through their retirement accounts.
REITs aren’t especially risky investments, however, so they don’t grow or appreciate value as much as other investments might.
Real Estate Funds
Real estate funds are a type of mutual fund that invests in public real estate securities, sometimes including REITs. Real estate funds are more of a long-term investment than REITs and provide their value through appreciation rather than dividends.
Unlike REITs, real estate funds tend to be diversified and invest in many types of properties – not just commercial real estate. Real estate funds are managed by professionals, which saves investors the trouble of doing extensive research on where they should put their money.
While still considered a passive investment, remote ownership offers investors a little more control, making it a good option if you want some involvement with your properties but don’t want to be a landlord.
With remote ownership, an investor can own an investment property but rely on and oversee an on-site property manager who will be responsible for upkeep. Many remote investors live out of state and keep tabs on their properties digitally or through phone calls.
Remote investing is useful because it allows potential investors to take advantage of areas in higher demand, even if they’re far away. It can be risky, however, since you’ll be relying on others to manage your investment if you don’t plan on visiting often.
The Benefits And Risks Of Investing In Passive Real Estate
Investing passively can be a great way to make some extra cash and invest in your future – but like any investment, it’s not risk-free. Let’s take a look at what you can expect when getting started with passive real estate investments.
Passive Investing Benefits
- Less money required. You can start investing in real estate passively even if you initially don’t have a lot of money to invest. If you were investing actively by yourself, you likely wouldn’t be able to invest in an entire building complex – but by crowdfunding or investing in something like a REIT, you can.
- No deep knowledge needed. Likewise, you don’t need extensive investing knowledge to begin investing passively in real estate. You can invest in something like a REIT or real estate fund and not worry about knowing how to manage an investment property.
- Better liquidity. Passive real estate investing offers better liquidity than active investing and will take up less of your time since you don’t have to manage the property.
- Less work. There’s usually no physical labor or work involved with passive real estate investing – you simply invest your money and watch it grow. No flipping houses, no collecting rent.
Passive Investing Risks
- Not as profitable. Active real estate investing can be far more profitable. While it requires extra work to do something as large as a fix-and-flip, it can be much more profitable.
- Hands off approach. When you invest passively, you often put investment decisions in the hands of others. If you invest in a real estate fund, the person who runs the fund will choose all of your investments. Likewise, if you’re doing remote ownership, someone else is managing your property in person – and there’s always the chance they could do a poor job with upkeep or management.
- Market fluctuations. Regardless of whether you’re managing a property in person, there’s always a risk that issues like vacancies and depreciating property values could hurt your profits. Investing, even in something considered as “low-risk” as real estate, always carries some risks. For example, whether an investment is successful largely depends on the state of the market.
Passive Real Estate Investing FAQs
Below are some commonly asked questions about passive investing in real estate.
How does passive real estate work?
With passive investing in real estate, you essentially hope to watch your money rise while someone else manages the properties. Of course, this doesn’t happen overnight, but it’s attainable with the right strategy and a little luck.
Is real estate good passive income?
Real estate can be great passive income if you do the research and take the necessary steps to become a good investor. This means choosing the right properties and hiring the right people to take the stress out of your investment.
Is passive real estate worth investing in?
Passive real estate is worth investing in if you’re in the right financial position to pursue it. If you’re short on cash, focus on building your savings first. Once you have some extra money, putting it toward a passive real estate investment can be a worthwhile option.
The Bottom Line: Passive Investing Has Its Upsides And Downsides
Passive real estate investments can be a good way to earn a steady stream of cash without having to worry about managing or renovating property. That said, these investments aren’t for everyone, and more active investments such as flipping houses may be more appealing to some investors.
If you’re interested in becoming a full-fledged real estate investor, you have more than one option to consider. For other articles and tips on investing in real estate, check out the Rocket Mortgage® Learning Center.
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