What Is Passive Real Estate Investing And How Does It Work?
Sidney Richardson5-minute read
May 19, 2021
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 that sounds like a lot of work to you, fear not: there is such a thing as 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 it work? Here’s what you need to know.
What Is Passive Real Estate Investing?
A passive real estate investment doesn’t require extensive effort from the investor to maintain. There are a few different ways to invest in real estate passively, including real estate investment trusts (REITs), crowdfunding opportunities, remote ownership and real estate funds.
With these types of investments, you can make extra income without having to do any physical labor or act 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 yourself.
Passive Vs Active Real Estate
There are a few key features of passive real estate investments that differentiate them from more “active” types of investment.
- With active real estate investments, the investor typically owns and manages the property themselves. Passive investors don’t typically deal with properties in person and may never even see the real estate their money is invested in.
- There are typically more responsibilities associated with active real estate investments, such as 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 you the same tax benefits as active real estate investments, but they also don’t require much experience to get into. These types of investments tend to have better liquidity in comparison as well.
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How To Invest In Passive Real Estate: Tips For Success
There are several common investment opportunities that can be a good start if you’re just getting into passive real estate investing. Most methods of passive investment fall into these categories: crowdfunding, REITs, real estate funds or remote ownership.
Real estate crowdfunding is exactly what it sounds like – with the help of other investors, you can pool your resources to invest in something larger than you might have been able to tackle on your own. This method is usually done entirely online using platforms that allow a multitude of users to pool funds and invest indirectly in mortgage loans anywhere in the country.
This can be a great way to collect passive income and 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, as they are usually publicly traded similarly to stocks. Many Americans are invested in REITs through their retirement accounts.
REITs are not especially risky to invest in, 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 more diversified and invest in many types of properties, not just commercial real estate. They’re managed by professionals, which saves investors the trouble of having to do extensive research on where they should put their money.
While still considered a passive investment, remote ownership is an option with a little more control involved, making it a good option for the investor that wants some involvement with the properties they invest in, but not necessarily the role of landlord.
With remote ownership, an investor can own an investment property but rely on and oversee an on-site property manager who will take care of upkeep. Many remote investors keep tabs on their properties digitally or over phone calls, as they are often far away or out of state.
Remote investing is useful because it allows potential investors to take advantage of areas with higher demand, even if they are far away. It can be risky, however, since you will be relying on others to manage your investment if you don’t plan on visiting often (or at all).
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 it doesn’t come without risks, like any investment. Let’s take a look at what you can expect when getting started with passive real estate investments.
- You can start investing in real estate passively even if you don’t have a lot of money to invest right away. If you were investing actively by yourself, you likely wouldn’t be able to invest in an entire building complex by yourself – but by crowdfunding or investing in something like a REIT, you can.
- Likewise, you don’t have to have extensive investing knowledge to get started investing passively in real estate. You can invest in something like a REIT or real estate fund without ever having to worry about knowing how to manage an investment property.
- 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 yourself.
- There is 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.
- Active real estate investing can be far more profitable. While it does require extra work to do something as large scale as a fix-and-flip, it can bring you potentially much more in terms of returns.
- When you invest passively, you often put investment decisions in the hands of others. If you invest in a real estate fund, all of your investments are chosen by whoever runs the fund. 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.
- Whether you’re managing a property in person or not, there’s always a risk that things like vacancies and potentially depreciating property values could hurt your profits. Investing, even in things considered as ‘low-risk’ as real estate, can always potentially become risky, depending on the state of the market.
The Bottom Line: Being Passive Can Be A Win In Investing
Passive real estate investments can be a good way to earn a steady stream of cash without having to toil over renovating a property or worry about managing real estate yourself. That said, these investments aren’t for everyone, and more active investments such as flipping houses may appeal more to some investors.
If you’re interested in becoming a fully fledged real estate investor, check out our guide to everything you need to know about buying an investment property.
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