What Is Passive Real Estate Investment and How Does it Work?
Passive real estate investment is a potentially lucrative way to make your money work for you. This form of investing allows you to take a passive role in securing and maintaining your investment real estate property. This differs from active real estate investment which requires more hands-on interaction with the property.
There are some misconceptions as to what passive real estate investment really means. Some think of it as a simple process of buying a piece of property and renting it out for income. This is not necessarily what passive real estate investment refers to. Passive real estate investment would include selecting a property to purchase, then choosing a property management company to make regular decisions concerning marketing, tenant screening, maintenance, and other daily operations of a property. If an investor chooses not to outsource these tasks, the responsibility to manage the daily tasks of owning the property would fall on them. This is commonly referred to as active real estate investing.
What Is Active Real Estate Investing?
Active real estate investing means the investor is directly involved with their property investment. This includes purchasing the property, marketing it, selecting tenants, collecting rent, and taking care of maintenance requests. This is essentially taking on the role of a landlord. This can be a great option for an investor who is located in the area, has experience handling these different tasks, has great people skills, and has the time and willingness to spend the majority of their time dealing with the investment property. Active real estate investing is also common for investors who are interested in flipping properties. This involves purchasing a home that is available at a lower cost due to needing extensive repairs or being outdated. The purchaser remodels the home, selling it for a higher profit. This form of investment doesn’t typically involve any renting, or residency within the property until it is sold again.
Why Choose a Passive Real Estate Investment?
Passive real estate investment provides passive income. This can be beneficial for those who want to make a profit or generate an income without adding further responsibilities to their plate. This is also a great opportunity for those who are newer to the world of real estate investment and don’t have a lot of upfront capital with which to work. Passive income refers to an income stream that is automated to some extent. This is typical in situations where an upfront capital investment is made which provides some kind of ownership stake in the property. The investor is then paid regularly whether that be through share dividends or rent. This is considered passive income because the investor is not directly managing the investment.
Passive real estate investment is a form of real estate investing where an investor will put capital into a venture knowing that there will be no need for direct involvement or responsibility when it comes to managing the property. With passive real estate investment, you don’t have to deal with the property in person. You may not even ever see the property. Passive real estate investment is ideal for those who don’t necessarily have, or don’t want, a lot of experience with property management. This allows investors to keep their focus on real estate investing, allowing them to potentially grow their business to include more properties.
Different Ways to Get Involved in Passive Real Estate Investment
Passive real estate investment can take on many forms of investment. It largely depends on what is best for the investor. All passive real estate investment opportunities have the capability of providing real passive income, helping to build an investor’s portfolio and their steady cash flow. It is beneficial to understand the different types of passive real estate investment to determine what kind of investment is best for you.
Crowdfunding is a popular method for investors to gain capital and better their investment portfolio. Crowdfunding operates by having several investors come together to pool their available resources and invest in a larger project. This is a great way for newer investors to get involved. If you are newer to the real estate investment world, you likely won’t have the upfront capital to fund a major purchase, such as an apartment complex. Crowdfunding allows an investor to get involved in an investment that may have been impossible to tackle alone. Crowdfunding typically takes place entirely on an online platform that allows a convenient way for multiple users to pool their funds and invest indirectly in mortgage loans anywhere throughout the country.
Real Estate Investment Trusts (REITs)
REITs are another type of passive real estate investment. This passive real estate investment involves different companies that operate as trusts. These companies invest in various real estate and pay the profits made as shareholder dividends each year. This is another great way that investors can pool their capital together to have the opportunity to invest in large real estate deals. When using this form of passive real estate investment, you don’t have to worry about caring for the property, collecting rent, or maintaining the property. REITs are usually publicly traded in a fashion similar to stocks. This type of passive real estate investment tends to be less risky, but it also doesn’t grow or appreciate in value as much as other investments might.
Real Estate Funds
This passive real estate investment is a type of mutual fund that invests in public real estate securities which can sometimes include REITs. The types of investments could include real estate development companies, large real estate brokers, or construction companies. This means that real estate funds tend to be more diversified, allowing an investor the opportunity to invest in many different types of properties. This type of investment is typically more of a long-term investment that can provide value and capital through appreciation rather than dividends. One of the biggest perks of this passive real estate investment is that it is managed by professionals. This saves investors the worry of having to do extensive research to ensure they are investing their capital into the right real estate.
This type of passive real estate investment provides a bit more control than the other passive real estate investment options. This is a good option for investors who want some form of involvement, but not the full involvement of a landlord. This involves owning a real estate property but relying on a professional property management company to take care of general operations and upkeep. When choosing remote ownership, an investor usually keeps tabs on their property either digitally or over the phone. This is great for investors who want to take advantage of real estate in areas that are in high demand without having to worry about being directly in the area.
Remote ownership is a great option for investors who are interested in passive real estate investment but find it rewarding to play a role in the investments they make. This can be a great opportunity to branch out from other forms of passive real estate investment that don’t require a lot of knowledge or experience. This investment opportunity can also provide a better return on investment, tax incentives, and the ability to stand out as an independent investor.
Benefits of Passive Real Estate Investment
There are several benefits for investors who choose the route of passive real estate investment. It is helpful to understand the different perks of choosing the passive real estate investment route. No matter what type of investment you choose, these benefits apply to all different types of passive real estate investment.
This includes the ability to start investing passively without the need to have a lot of capital to invest right away. Investment types, such as crowdfunding or REITs, allow investors to come together to maximize the benefit of selecting a larger size property. These also provide a great opportunity to learn from other investors before putting more capital into play.
Don’t Need Extensive Knowledge
With passive real estate investment, you don’t need to have extensive investing knowledge. No matter what form of real estate investment with which you get involved, there is always the risk of investing in a property that may deal with constant vacancies or depreciate in value which could hurt your profits. With certain forms of passive real estate investment, the amount you lose can be significantly less when pooling with other investors. This is also a great opportunity to learn from both successes and failures of investment. Investors can make more informed choices when choosing how they will proceed with subsequent investments, choosing to go in with only a few other investors or investing solo.
Less Time and Commitment
Passive real estate allows an investor to start gaining capital without having to put in a lot of hard work. As a passive investor, there is no physical labor involved, nor do you have to be involved in the operation of the property unless you choose to do so, such as choosing remote ownership. With passive real estate investment, an investor essentially invests their available capital and sits back to watch it grow. While you still have to invest wisely, you’ll be able to use your time to explore your next investment opportunity.