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

Passive real estate investing lets you earn income from property with minimal day-to-day work. Average annualized returns have ranged from about 7% – 12% in some offerings, though results vary. Learn more about how passive real estate investing works, your main options, and the key benefits and risks to weigh before you invest.

What is passive investing?

Passive income real estate means earning income from property with minimal ongoing effort. Most investors buy a property, rent it out, and collect rent from the tenants. They usually hire a property manager to handle day-to-day tasks and maintenance.

Common ways to invest in properties include real estate investment trusts (REITs), crowdfunding platforms, and co-investment groups.

How to spot passive vs. active real estate investments

Both build wealth through real estate investing, but they work in different ways.

Explore the types of real estate investments to find the best fit for your goals.

Passive income types explained

1. Crowdfunding

Real estate crowdfunding lets investors pool funds for specific properties, with minimums from $500 to $25,000 and more. It offers diversification across multiple projects – even after mortgage costs – but you give up control to property managers and share profits with your co-investors.

2. Real estate investment trusts (REITs)

A REIT lets you buy shares in a professionally managed real estate portfolio, sometimes for as little as $5. REITs must pay out at least 90% of their profits as dividends, offering reliable passive income with high liquidity. Also, REITs must have at least 100 investors and earn at least 75% of their income from real estate activities.

3. Real estate funds

Real estate funds are mutual funds or exchange-traded funds (ETFs) that allocate investor capital across a range of real estate investments. For example, a real estate ETF could invest in a mix of REITs or track a real estate index. Through those entities, you'll likely own commercial property, multifamily homes, or entire developments. Each has its own focus areas, and some may operate like rental property mutual funds. Like publicly traded REITs, you can often buy in with as little as $5 through your brokerage account.

4. Remote ownership

Invest in a property outside your local market and hire a property manager to handle daily operations. This maximizes investment ROI in lower-cost regions but requires trusting someone else with your asset.

5. Fractional ownership

Co-own properties with a small group of investors, sharing risk and real estate carrying costs. Common structures include tenancy in common or joint tenancy for spouses and family members.

The benefits and risks of passive real estate investing

There are pros and cons to passive real estate investing to weigh before you put in any money.

Benefits

• Earn rental income with little day-to-day effort
• Start with less capital using REITs or crowdfunding
• No landlord experience needed. Professionals manage rental properties for you
• Tax advantages like depreciation deductions and 1031 exchanges

Risks

• Lower profit ceiling than hands-on investing
• Tied to real estate market fluctuations
• Vulnerable to vacancies and poor property management

FAQ

Here are answers to common questions about passive real estate investing.

How does passive real estate work?

Investors contribute capital to generate income without ongoing work. Start small, set clear goals, and research before committing.

Is real estate a good source of passive income?

It can be. Careful analysis before investing is key to finding profitable opportunities.

What are the tax advantages?

Tax advantages include depreciation deductions, expense write-offs, and deferral of capital gains through a 1031 exchange. Consult a tax professional for guidance.

The bottom line: Passive investing offers hands-off ROI

Passive real estate investing offers a path to steady income without becoming a full-time landlord. Options exist for every budget – from a $5 REIT to a crowdfunding platform. Do your homework on mortgage costs, real estate carrying costs, and market conditions before you commit.

If you're ready to invest, explore your borrowing options today with Rocket Mortgage.

This article is for informational purposes only and is not intended to provide financial, investment, or tax advice. You should consult a qualified financial or tax professional before making decisions regarding your retirement funds or mortgage.