While you may associate real estate investing with renovating houses to sell or playing landlord, there are a handful of less active ways to invest in the real estate market.
Passive real estate investing allows you to diversify your investment portfolio and profit from real estate properties without playing a hands-on role.
In this guide, we’ll explain how passive real estate investing works and weigh its advantages so you can determine if it’s the right strategy for you.
What is Passive Real Estate Investing?
Passive real estate investing is a strategy where investors provide capital for a real estate investment.
- You aren’t responsible for scouting or buying homes, fixing them up, or actively managing rental properties.
- You don’t directly manage the investments themselves, instead giving your money to professionals to invest in real estate assets for you.
Passive Vs. Active Real Estate Investing
Ultimately, there are two main ways to make money in real estate.
The first approach, active investing, requires you to put in substantial effort on an ongoing basis. For example, an investor may buy a property, flip it for a net gain, then move on to the next one.
Meanwhile, passive real estate investors collect money without making much or any effort at all. There are multiple ways to engage in passive real estate investing, which we’ll take a look at below.
Types of Passive Real Estate Investing
When it comes to passive real estate investing, there are a few different approaches you can take.
1. Real Estate InvestmentTrusts (REITs)
REITs are like mutual funds for real estate, with different types to choose from. Some REITs deal primarily with residential properties, while others focus on industry-specific investments like telecommunications infrastructure or healthcare facilities.
You can select from publicly-traded REITs, which trade on the stock market and online platforms, public non-traded REITs from real estate crowdfunding platforms, and private REITs, which are not listed with the SEC.
REITs give investors passive income in the form of dividends. To retain their REIT status, these companies are required to dish out 90% of their profits in the form of dividends.
If you put enough REITs in your real estate portfolio, you can develop steady real estate income streams.
With a crowdfunding platform, you sign up for a service and gain exposure to a portfolio of real estate options you can invest in.
Crowdfunding platforms provide access to REITs that produce ongoing passive income. You can receive monthly or quarterly dividend payments depending on the platform you sign up for.
Like all investment strategies, crowdfunding is risky. However, it can potentially lead to higher-than-average gains.
3. Real Estate Funds
Real estate funds are a type of mutual fund that combine investments from multiple investors to buy real estate assets and manage them.
These funds can consist of a variety of properties, from commercial office buildings to residential rental properties.
Investors in real estate funds get the benefit of diversification since funds are invested in a variety of properties and markets.
Additionally, real estate funds can provide regular income through rental payments and potential capital appreciation as the properties increase in value over time.
However, like all investments, real estate funds carry risks, so it’s essential to carefully evaluate the fund’s strategy and performance before you invest.
4. Managed Properties
The other way to produce passive income through real estate is by investing in rental properties and hiring real estate agents and property management companies to rent and maintain them so you don’t have to deal with the day-to-day operations.
Single-family homes, apartments, and condos are popular income-producing properties to buy directly. You may also want to invest in commercial space.
When you own a rental property, you ideally make rental income every month. How much you make depends on a few factors, including the location and quality of the property and the amount of maintenance it needs.
While you can certainly make money this way, the barrier to entry is higher. Unless you’re flush with cash, you’ll need to convince mortgage lenders to help finance your investment.
Ultimately, buying rental properties directly is risky, but with greater risk comes the potential for greater reward. Just make sure to complete your due diligence before buying your first rental property.
Benefits of Passive Real Estate Investing
Now that you have a better understanding of some of the ways you can generate passive income in real estate, here are some key advantages:
- Simplicity: Unlocking passive income streams helps you ease off the gas and make money without working quite as hard. As a passive investor, you can get paid as you attend your kids’ soccer games, have dinner with your family, or relax on the beach.
- Retirement income: Passive real estate income can make retirement enjoyable and stress-free by providing a steady cash flow. It’s a great way to supplement your pension, Social Security income, and retirement fund distributions. The trick is to start investing in real estate while you’re young so you can pump excess gains into tax-friendly retirement funds and let them grow over time.
- No expertise needed: You don’t have to be a full-time investor with loads of experience making complex investment decisions to get in the real estate game, thanks to crowdfunding platforms and REITs.
- Low financial requirements: Similarly, you don’t have to be a high net-worth investor with millions to spare to start passively investing in real estate. Even if you don’t have the means to purchase a property alone, you can invest in a REIT with other investors.
- Liquidity: Passive real estate investments can pay off faster than some active investments, with less downtime spent researching, buying, and maintaining properties and more time making money.
Disadvantages of Passive Real Estate Investing
Passive real estate investing also has a few potential downsides that are worth considering.
- Lack of control: First, you have less control over properties and their management decisions when you decide to invest passively.
- Expenses: Second, if you buy into a property directly, there’s a risk of unexpected expenses, such as repairs or legal fees, which you would be responsible for as the owner.
- Returns: Third, passive investing typically has lower returns compared to active investing. While you may have to put in more work on a property you renovate or manage, that hard work can result in a higher payoff.
- Market changes: Depending on the market, property values can depreciate after you make your investment. There’s also a risk of vacancy when you invest in real estate, whether you invest actively or passively.
Tips for Generating Passive Real Estate Investment Income
Here are some important factors to keep in mind before you get started as a passive real estate investor:
- Choose a strategy: What works for other investors may not be best for you. Know your options and pick a strategy that makes sense for your personal needs. You may be in a position to take on a turnkey rental property and bring in gains from monthly income. Or you may want more of a hands-off
- Understand Your Risk Tolerance: One of the most important steps, before you start investing, is to assess your overall portfolio and risk tolerance. Determine whether it makes sense to invest or if you’d be better served with less risk.
- Pay Down Debt First: If you’re in credit card debt or have serious student loans, lower your balances before you move forward with real estate investing. Otherwise, high-interest debt could negate your returns. Look at your overall debt and monthly payments. The lower you can get that number, the better position you’ll be in.
- Make Sure You’re Ready for a Property: Owning a property can be a huge headache even if you aren’t actively managing it. Think twice about picking up a rental property for passive income, especially if you already have a house and a mortgage. Make sure you’re in a position to manage a property and that you’re comfortable taking on that type of investment.
Frequently Asked Questions
What is the most passive real estate investment?
REITs (real estate investment trusts), real estate funds, and real estate crowdfunding are the most passive real estate investments.
Purchasing a property and then hiring a company to manage it is also a form of passive real estate investing, but it requires a little more work and potentially more capital upfront.
What is a good ROI on rental property?
The average ROI for a real estate property in the US is around 10%. Ideally, your property should yield 8-12% to be considered a good return on investment. Some investors are more ambitious, aiming for at least a 15% return.
Do single-family or multifamily homes have higher returns?
Multifamily homes typically bring in more income because there are more tenants making payments on a monthly basis.
That said, there are also more costs associated with a multifamily home, and the property may be more expensive depending on its size, location, and market demand.
What is real estate syndication?
This type of real estate deal involves going in on an investment property with multiple investors, who may be accredited or unaccredited.
Real estate syndication is used for a variety of real estate investments like apartment buildings, office buildings, and multifamily houses. This strategy is a solid investment opportunity because of its lower risk. That said, it requires you to do your due diligence to ensure all the investors are trustworthy.
Can you make money with real estate crowdfunding?
You can make a lot of money with real estate crowdfunding if you pick a platform with low fees and a selection of high-end properties.
That said, you can also lose money with real estate crowdfunding. Platforms do a great job of exposing customers to properties, but by doing so, they also expose them to risk. Make sure you understand the real estate market before getting involved.
The Bottom Line
Passive real estate is one of the top wealth-building strategies for investors. If you aren’t comfortable dealing with tenants or flipping houses, a passive approach can be easier to manage.
Whether you want to invest in apartment complexes, houses, or office buildings, you have plenty of passive real estate investment options.