What is passive real estate investing and how does it work?

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 can also pursue a passive real estate investment strategy.

Passive real estate investing is a great way to earn extra money without the work and attention more “active” forms of investments require, 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 to develop your passive investment portfolio.

What is passive investing?

A passive real estate investment doesn’t require extensive effort from an investor to maintain it. Investors who want to invest in real estate for passive income can look into real estate investment trusts (REITs), crowdfunding opportunities, remote ownership and real estate funds.

These types of investments allow investors to generate real estate income without physical labor or the responsibilities of a landlord. Some investments, like REITs, are similar to investing in mutual funds or the stock market and allow real estate investors to earn extra cash without buying properties.

Passive real estate investments vs. active real estate investments

A few key features differentiate passive real estate investments from “active” types of real estate investments, including:

• The investor typically owns and manages a property with an active real estate investment. Passive investors generally won’t deal with properties in person and may never even see the real estate they invested
• Active real estate investments have more responsibilities, including property repairs and updating lease agreements.
• Passive real estate investments offer less control over the investment and may not bring the same tax benefits as active real estate However, passive investments don’t require much real estate experience and tend to provide better liquidity than active real estate investments.

How to invest in real estate for passive income: Tips for success

Some 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 four categories: crowdfunding, REITs, real estate funds or remote ownership.

1. Crowdfunding

Real estate crowdfunding is just what it sounds like. You raise and pool money with other investors for a real estate project or investment you may not have afforded alone. This method is usually reserved for online crowdfunding platforms where users can pool funds and invest indirectly in mortgage loans across the country.

Real estate crowdfunding shares similarities with online platforms that allow users to invest in partial shares of company stocks.

2. Real estate investment trusts

Real estate investment trusts (REITs) invest in various types of real estate – like apartment buildings and commercial properties – and annually pay out profits as shareholder dividends.

REITs manage properties and collect rent. In some cases, they fund mortgages and collect interest. REITs are publicly traded trusts, and like stocks, they make investors money by paying out dividends. Many Americans diversify their portfolios and generate income by investing in REITs through their retirement accounts.

REITs typically provide a steady stream of cash. You shouldn’t expect them to deliver the explosive growth or payouts of riskier investment options.

3. Real estate funds

A real estate fund is 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 value through appreciation rather than dividends.

Unlike REITs, real estate funds tend to be diversified, investing in many types of properties – not just commercial real estate. Because professionals manage real estate funds, investors don’t need to spend time doing extensive research to figure out where to put their money.

4. Remote ownership

While remote ownership offers investors a little more control, it’s still considered passive investing, making it a good option if you want some involvement with properties but don’t want to be a landlord.

With remote ownership, an investor owns the investment property but relies on an on-site property manager or management company to oversee the property and its upkeep. Many remote investors live out of state and keep tabs on their properties through emails or phone calls.

Remote investing allows potential investors to purchase properties in high-demand areas they live far away from. However, relying on others to manage your investment property can present challenges, especially if you don’t plan on visiting often.

The benefits and risks of investing in passive real estate

Passive investments 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 look at some pros and cons of passive real estate investments.

Passive investing benefits

• Less money required: You can start passively investing in real estate with smaller amounts of money upfront. On your own, you may not have the funds to invest in an entire building but through crowdfunding or investing in a REIT, you can pool money with other investors to buy the complex or shares of the complex.
• No expertise necessary: Passive real estate investing doesn’t require extensive real estate knowledge or experience. You can invest in a REIT or real estate fund without knowing how to manage an investment property.
• Increased liquidity: Passive real estate investing offers better liquidity than active investing and will take up less of your time since you aren’t managing a property.
• Less work: There’s usually no physical labor or work involved with passive real estate investing – you just invest your money and watch it grow. You don’t have to flip houses or collect

Passive investing risks

• Not as profitable: Active real estate investing can be far more profitable than passive investing. While a fix-and-flip requires a significant amount of work, you can make more money when you sell.
• Hands-off approach: When you invest passively, you put investment decisions in someone else’s hands. If you invest in a real estate fund, the person running the fund will select all investments. If you have remote ownership of a property, someone else is managing it – and they may or may not be doing a great job.
• Real estate market fluctuations: If you have remote ownership of a property (or even manage the property yourself), vacancies and depreciating property values can hurt your profits. Investing in real estate, something considered “low risk,” always carries some risks. Often, the success of an investment will largely depend on the state of the housing market.

Passive real estate investing FAQs

Below are some commonly asked questions about passive real estate investing.

How does passive real estate work?

The goal of a passive real estate investor is to watch their income stream grow while someone else manages a real estate fund or a property, such as commercial properties or multifamily homes.

Is real estate investing a good source of passive income?

Real estate investments can be a great way to generate passive income. To help select profitable investments, research and take the necessary steps to become a good investor. This can mean choosing valuable properties or hiring the right people to take the stress out of your investments.

Is passive real estate worth investing in?

Passive real estate is worth investing in if you’re in the financial position to pursue it. For instance, if you’re short on cash, focus on building your savings until you can remotely invest in a property. Or you can use your savings to raise money with other real estate investors on a crowdfunding site and put it toward a passive real estate investment.

The bottom line: Passive investing has its upsides and downsides

Passive real estate investments can be a reliable way to earn a steady income stream and increase your net worth without needing to manage or renovate properties. If you prefer having more control over your investments, more active investments, like flipping houses or buying investment properties to rent, may make more sense.

If you’re thinking about building your real estate portfolio with an investment property, you must decide how to finance your purchase. One option is to take the next step and start your mortgage application with Rocket Mortgage® today.