Real estate investing is a popular path to wealth. You can buy properties with leverage, rent them to tenants, and collect cash flow. This cash flow pays off the mortgage, allowing you to build free equity in a valuable asset. Long-term investors expand their profit margins after fully paying the property’s debt.
Real estate sounds great on paper, but an active approach presents several challenges. You may have several months of vacancy, select the wrong tenants, and perform frequent repairs. Before you know it, active real estate management can feel like a full-time job. More investors are switching to a passive real estate approach. We will share how to get started with passive real estate investing and the advantages you’ll get from this path.
What Is Passive Real Estate Investing?
Passive real estate investing is similar to buying stocks. Stock investors gain exposure to a company’s performance through shares. Buying more shares gives the investor more exposure. These investors don’t perform day-to-day operations within the company. Instead, they provide the capital and hope the company uses it properly.
Passive real estate investing gives you exposure to property investing. You will own shares in the property instead of the entire property. Even though you don’t own the property, you will still get cash flow. Investors receive a percentage of cash flow based on how many shares they own.
Active vs. Passive Real Estate Investing
Active real estate investing is more hands-on than a passive approach. Active real estate investors do property research, buy assets, maintain them, find tenants, and perform other responsibilities. As a result, active investors make more money than passive investors, but they also put in far more time.
Passive investors trade some profits for their time. You won’t have to spend hours of your time each week finding tenants, looking up properties, making repairs, and hearing complaints. You won’t have to worry about legal expenses and other fees. Large corporations can more comfortably absorb these costs. These costs can affect your cash flow, but legal costs can be more devastating for the active real estate investor with a small portfolio.
Is Passive Real Estate Investing For You?
Passive real estate investing makes real estate more accessible. You can get into deals sooner without raising substantial capital. It’s less work and offers an easier path to entry. You can test the waters with very little capital to see if you like the passive approach.
Benefits Of Passive Real Estate Investing
Passive real estate investing can make a great addition to your portfolio. Anyone who uses this investing strategy gets to reap the following benefits.
Start Investing Right Away
You can start looking at passive real estate investing options and invest on the same day. Someone else owns the properties and does the research for you. These companies have the right management in place and vast networks. Active real estate investors have to build networks and spend over a year looking for a property and negotiating before making a deal.
You Don’t Need Extensive Knowledge To Invest
Passive real estate investors don’t have to stay up to date on local trends and know the basics of real estate. These investors hand their money to savvy real estate professionals who manage the money. These professionals know how to find great deals and maximize cash flow.
Less Capital Involved
Many people can’t get into real estate because of the capital requirements. Most people make a 20% down payment on their homes. A $500,000 property often requires a $100,000 upfront investment along with monthly mortgage payments. Few people can comfortably manage multiple mortgages, especially if they make lower down payments. Passive investors have fewer financial worries. These investors gain exposure to real estate without a high down payment or monthly mortgage costs. Management will pay these costs before giving you cash flow and price appreciation. This structure makes it less capital intensive for passive investors to enter real estate.
No Active Labor/Work
Did the toilet overflow? You’ll want to address the spill quickly before mold grows in the bathroom. Now, imagine you’re on a vacation when this happens. A wonderful trip can get ruined with the thoughts of what you’ll have to do when you return.
Passive real estate investors don’t have to worry about this scenario. Other companies hold onto real estate and hire property managers to take care of any issues. So real estate won’t feel like a second job if you take the passive approach.
Generate Cash Flow
Cash flow is real estate’s great strength. Active and passive investors both generate cash flow from their investments. However, passive investors do less work. There are companies that buy real estate and do their homework before purchasing a property. Real estate professionals have more experience and can detect bad deals. A beginner may learn these mistakes early on, limiting cash flow and discouraging future acquisitions.
Better Liquidity
Real estate is considered an illiquid asset. Before finding the right buyer, a real estate agent may promote your listing for several months. You’ll still have to jump through several hoops before closing the deal and receiving your payment.
Passive real estate investing works differently. Some investment structures let you sell shares at any time. You can quickly enter and exit real estate positions as you would with equities in the stock market. Better liquidity provides much quicker cash for emergency expenses, a smooth retirement, or another reason.
Risks Of Passive Real Estate Investing
Every asset has strengths and weaknesses. The best investors look at both perspectives before putting their funds to work. We will highlight some of the risks associated with passive real estate investing.
The Real Estate Market May Be Unpredictable
Real estate prices don’t always go up. Unpredictability in the markets can lead to corrections and crashes. Popular areas can lose their shine in a few decades, which would lower property valuations. Every investment has a degree of unpredictability. For real estate, investors must consider local trends and the macro environment.
Less Profit Than Active Investing
You can make more money as an active investor. Companies cover expenses and pay their teams before distributing funds to passive investors. The reduced profitability gives you more time to do other things in your life. Some people get started with passive real estate investing to generate cash flow and understand the business model. These people may become active investors or settle with the passive approach since it requires less time.
Less Control Over Your Investment
Passive investors rely on real estate professionals to manage the property, find the right tenants and perform other tasks for the property’s long-term success. Some investors will not like handing over that much control, but professional investors know what they are doing. These investors have gained many experiences that can lead to more cash flow. Stock investors are often okay with less control as long as the company has strong management and pursues excellent opportunities. Passive real estate investors have the same mentality for their capital.
Ways You Can Get Started in Passive Real Estate Investing
Passive real estate investing is a great way to learn about real estate and generate cash flow with a lower time commitment. You can explore these options to embark on passive real estate investing.
Crowdfunding
Investors pool their money together to buy a property. A crowdfunding organizer will lead this effort and buy the property. Some organizers provide monthly cash flow from tenant payments, while others fix and flip properties for quick profits.
Remote Ownership
Some investors have enough money for the down payment, mortgage, and other expenses. Remote ownership investors buy properties and have an on-site property manager handle everything. This manager receives tenant calls and fixes the toilet and other issues instead of you. You should check in with your property manager weekly to stay updated on the property.
Real Estate Investment Trust (REITs)
Real estate investment trusts hold onto several properties and distribute funds to shareholders. REITs give you exposure to many real estate asset classes. For example, you can buy REITs that hold apartments, offices, warehouses, and other properties. REITs often trade on the stock market and raise their dividends each year.
Trust Deed Investing
Trust deed investors receive monthly interest payments from a loan. A property’s deed of trust secures the loan. Trust deed investors act as banks and receive residual payments.
Private Real Estate Equity
Private real estate equity investors pool their resources together to buy large complexes. While crowdfunding campaigns may help you buy a single-family home, private real estate equity can acquire apartments. In addition, private real estate equity firms provide shareholders with reports that reveal new opportunities and provide updates on the current project.
