Passive investing in real estate means you profit on your investment with almost no effort on your part. Your financial returns continue to grow through passive investment while you do other job or business. It is perfect for those with busy schedules or other major commitments and do not have much spare time to actively pursue their real estate investment. By passive investment, you receive a regular income, which may be on a monthly, quarterly or yearly basis without taking part in the investment in an active way.
Real estate is often regarded as an alternative asset class, as compared to stocks and bonds. Though it is unchartered territory for many, it’s starting to garner more mainstream attention thanks to a number of digital platforms designed to make real estate investing more accessible to the masses.
What is the difference between active and passive investing?
The key difference between active and passive investing is based on the amount of continuing work involved to support the investment.
In active real estate investing, though you might be in control and the best tax benefits with fewest layers of fees, it requires extensive knowledge and can be a hassle for the landlord—the active participant. While in case of passive investment, there are no landlords. Instead, investors invest through syndications, online crowdfunding, individual real estate funds, and real estate investment trusts. It requires less experience while offering more diversification and liquidity.
What is passive investment in real estate?
Put simply, it is about investing in real estate without substantial involvement – on effort or active participation from the investor.
There are primarily two methods for passive investment in real estate—direct and indirect.
Passive investment in real estate – Direct
When it comes to direct passive investing, an investor will purchase a property or portion of a property that is then rented out. Often, real estate investors that purchase entire properties hire a property management company to take care of the day to day maintenance and tasks such as collecting rent. Post-purchase of the property, hiring a property management company allows an investor to essentially be hands-off in the management of the property. Hence the term passive real estate investing.
Passive investment in real estate – Indirect
On the other hand, indirect passive investing is a process where individuals invest in a REIT (Real Estate Investment Trust) or a real estate related mutual fund. This form of real estate investing is considered passive because there is no day-to-day management needed and it’s considered indirect because it doesn’t involve a specific piece of real estate. Investors collect passive income as returns or dividends from funds.
Different ways of passive investing in real estate:
Passive investing is often regarded as a smart way to invest in real estate.
There are some simple ways for passive investing.
Investing in Real Estate Investment Trusts (REITs)
Real estate investment trusts are corporations, trusts, or associations that invest in income-producing real estate. REITs give investors the option of investing in real estate without the expense of purchasing and maintaining an actual property. REITs generally have wider diversification, lower risk factors, and potential appreciation so they may be potentially beneficial additions to an equity or fixed-income portfolio.
This may work well for those looking to be passive investors because REITs are traded like a stock and one of the other potential benefits is the lower investment cost. Though it is appealing to income-oriented investors, sometimes it leaves less money in the end for reinvestment.
There are primarily three types of REITs:
Equity REIT: One of the most common forms of investment, equity REITs buy, own, and manage real estate properties that generate revenue. The potential benefit of equity REITs as a long-term investment is the passive income generated primarily from rents.
Mortgage REIT: These entities loan money for mortgages to real estate owners and operators. They purchase either existing mortgages or mortgage-backed securities. In this case, the revenue is generated mainly by the interest they earn on the mortgage loans. Mortgage REITs are sensitive to changes in interest rates as the dividends are based on the interest payments.
Hybrid REIT: These have a combination of both the equity and mortgage REITs in their portfolios. They earn money through a combination of rents and interest. They structure the portfolio to more property or more mortgage holdings depending on the investing focus as stated by the trust.
Real estate funds
Real estate funds are types of mutual funds that invest mainly in real estate. They also offer certain benefits that may appeal to passive investors. They offer greater diversification, which is intended to lead to reduced risk and a higher potential for returns. A major portion of a real estate fund is often invested in commercial properties such as apartment complexes, office, retail, and land.
Real estate crowdfunding refers to a group of investors that each contribute money to become part of a real estate deal. These investors have the opportunity to be a part of big ventures thanks to the multitude of investors that each contributes to the deal. Sometimes it also works to help a real estate investor who may have a lead for a lucrative deal but does not have the funds to invest in it. This is where crowdfunding may be useful as other investors pool their resources and help the active real estate investor to complete a project and sell it.
Real estate crowdfunding is mostly managed or operated through online platforms where you can own property and earn profits. Investors visit the online marketplace and browse through the opportunities that appeal to them. Once they select an investment that matches their requirements, their funds are pooled with other investors and the investment is closed. Investors then begin observing the performance of their investment and collect the passive income that may accrue from it.
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