The Ultimate Guide to Passive Real Estate Investing

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When you think about real estate investing, what might come to mind is someone who owns and manages land, homes, and rental properties, deals with tenants, renovates homes, and collects the rent. It is a popular type of investment for investors who like physical investments, one they can physically see and touch. The above explains an active real investor. However, passive real estate investing does not involve day-to-day engagement with rental management activities. You only contribute funds to the investment, mostly through a real estate investment group, then leave all the asset management to them. Like how you can own Tesla stocks, you own part of the company; however, you are not involved in the company’s daily activities. So, what exactly is passive real estate investment? This article will take you through all the pros and cons and how to get started.

 RawFunds - What is Passive Real Estate Investing?

What Is Passive Real Estate Investing?

 

Passive real estate investing involves contributing funds to a real estate investment trust (REIT) or syndicate group that is then involved in purchasing and managing the asset. REITs invest in assets including apartments, shopping malls, offices, and warehouses and profit from the rental income and asset appreciation. By law, REITs pay more than 90% of their taxable income to shareholders, and you as the investor receive payouts as dividends. It is a suitable and favorable investment opportunity since you can receive a good and steady income with minimal effort. REITs invest in various real estate options; however, a real estate syndicate invests in a single property. A real estate syndication brings together several passive investors and combines funds to purchase a real estate unit, then award profits on a percentage basis based on their contribution. Both offer several benefits. 

 

Benefits of Passive Real Estate Investment

 

  • Passive investment offers several advantages if you’re contemplating investing in real estate. Typically, passive investors are not involved in property management. You don’t have to worry about responsibilities such as lease agreements, rent collecting, and house repairs.
  • Since you’re not involved in daily management, passive investment requires less time involvement. You have plenty of time to work on other engagements and enjoy your hobbies.
  • Passive real estate investment doesn’t require much knowledge. In active investment, you require to have an in-depth understanding of the real estate market. It would be best to distinguish between a solid and a bad asset. In passive investment, you leverage the expertise of real estate professionals, so it doesn’t demand much skill from you.
  • Another advantage is risk diversification. As a passive real estate investor, you have a great opportunity to purchase a more significant and stable asset and invest in diverse asset classes. As a lone investor, it can be challenging to spread your equity.
  • Investing in real estate offers tax advantages. A Write-off for depreciation is one perk you can enjoy.

 

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How to get Started 

There are several options to get started in passive real estate. They include REITs, syndicate, crowdfunding and remote ownership.

 

REITS

 

REITs are real estate investment trusts. These companies invest in various types of real estate. They are then involved in taking care of the properties, collecting rental income, collecting interest and paying their profits to investors through dividends. REITs are usually publicly traded, allowing anyone to invest in large-scale estate. 

 

Syndicate

 

Real estate syndication involves several people combining resources to purchase an asset class. The most prominent members, called the syndicators, are involved in acquiring and managing real estate property. Typically, these individuals are equipped with knowledge of the asset to operate and manage it effectively. Syndications often operate as limited partnerships or limited liability companies (LLCs). 

 

Members draft agreements that outline several key factors, including communication practices, voting procedures, and profit sharing. If you’re an accredited investor, you can join an existing syndicate if you find their terms favorable. Also, you can create and register a syndicate if you find willing and like-minded individuals.

 

Crowdfunding

 

Although crowdfunding and syndicates share similar concepts, they differ in funding and capital requirements. Crowdfunding involves an individual or business pooling money from many people. It is mostly accomplished through online platforms such as GoFundMe or KickStarter. Real investment crowdfunding is an extremely popular passive investment opportunity. In a real estate syndicate, funds for an asset are collectively merged. In contrast, in crowdfunding, the individual or business pools funds from a large audience with minimal entry requirements. 

 

Remote Ownership

 

In this passive investment, an investor owns a real estate property and then relies on an on-site property manager who’ll manage the asset. This is a remote type of management where you can be far away but keep tabs on your investment. There’s a risk since you must trust the on-site manager to take care of your property effectively.

 

How Much do you Need to Start Investing

 

Passive real estate investment offers several possibilities that have different monetary requirements. Crowdfunding offers the cheapest option since some online platforms allow investments as low as $50 to $1,000 or so. This low financial requirement makes crowdfunding a smart ad trendy option for passive investors. REITs offer a more expensive option, offering options as low as $1,000. The amount can be as high as $25,000 or more. For a real estate syndicate, you must be an accredited investor. To be eligible, it is mandatory you have an annual income of at least $200,000 and $300,000 if you are married. Also, you are an accredited investor if your net worth exceeds $1,000,000. In remote ownership, you own the property but leave the management to someone else. As such, it requires you purchase the entire asset. 

 

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Risks of Passive Real Estate Investment

 

Despite the numerous benefits, passive investments have several drawbacks.

 

  • Passive real estate investment is less lucrative. Although there’s more work in active real estate investment, it offers better chances of profits. You get to enjoy all the benefits if your asset is profitable.
  • Further, in passive investment, other people make decisions on your behalf. So, whoever runs the REIT or the syndicator makes all crucial decisions. Also, in remote ownership, you must trust the on-site property manager does an excellent job.

Bottom Line

 

Investing in real estate can be profitable. Venturing into passive real estate provides a steady return without the hustle of managing property. Earn with little work and diversify your portfolio. However, with the several benefits highlighted, the practice is not ideal for everyone if you want more control over your investment.