What Is Passive Real Estate Investing And How Does It Work?

There are several common investment opportunities that can be a good start if you’re just getting into passive real estate investing. Most methods of passive investment fall into these categories: crowdfunding, REITs, real estate funds or remote ownership.

Crowdfunding

Real estate crowdfunding is exactly what it sounds like – with the help of other investors, you can pool your resources to invest in something larger than you might have been able to tackle on your own. This method is usually done entirely online using platforms that allow a multitude of users to pool funds and invest indirectly in mortgage loans anywhere in the country.

This can be a great way to collect passive income and is similar in some ways to online platforms that allow users to invest in partial shares of company stocks.

REITS

Real estate investment trusts, or REITs, are companies that operate as trusts. They invest in various types of real estate, typically commercial properties, and pay out their profits as shareholder dividends each year.

REITs take care of owning properties and collecting rent, or in some cases, funding mortgages and collecting interest. Investors can make money through REITs by investing in them, as they are usually publicly traded similarly to stocks. Many Americans are invested in REITs through their retirement accounts.

REITs are not especially risky to invest in, however, so they don’t grow or appreciate value as much as other investments might.

Real Estate Funds

Real estate funds are a type of mutual fund that invests in public real estate securities, sometimes including REITs. Real estate funds are more of a long-term investment than REITs and provide their value through appreciation, rather than dividends.

Unlike REITs, real estate funds tend to be more diversified and invest in many types of properties, not just commercial real estate. They’re managed by professionals, which saves investors the trouble of having to do extensive research on where they should put their money.

Remote Ownership

While still considered a passive investment, remote ownership is an option with a little more control involved, making it a good option for the investor that wants some involvement with the properties they invest in, but not necessarily the role of landlord.

With remote ownership, an investor can own an investment property but rely on and oversee an on-site property manager who will take care of upkeep. Many remote investors keep tabs on their properties digitally or over phone calls, as they are often far away or out of state.

Remote investing is useful because it allows potential investors to take advantage of areas with higher demand, even if they are far away. It can be risky, however, since you will be relying on others to manage your investment if you don’t plan on visiting often (or at all).

Investing passively can be a great way to make some extra cash and invest in your future – but it doesn’t come without risks, like any investment. Let’s take a look at what you can expect when getting started with passive real estate investments.

Benefits

• You can start investing in real estate passively even if you don’t have a lot of money to invest right away. If you were investing actively by yourself, you likely wouldn’t be able to invest in an entire building complex by yourself – but by crowdfunding or investing in something like a REIT, you can.
• Likewise, you don’t have to have extensive investing knowledge to get started investing passively in real estate. You can invest in something like a REIT or real estate fund without ever having to worry about knowing how to manage an investment property.
• Passive real estate investing offers better liquidity than active investing and will take up less of your time, since you don’t have to manage the property yourself.
• There is usually no physical labor or work involved with passive real estate investing – you simply invest your money and watch it grow. No flipping houses, no collecting rent.

Risks

• Active real estate investing can be far more profitable. While it does require extra work to do something as large scale as a fix-and-flip, it can bring you potentially much more in terms of returns.
• When you invest passively, you often put investment decisions in the hands of others. If you invest in a real estate fund, all of your investments are chosen by whoever runs the fund. Likewise, if you’re doing remote ownership, someone else is managing your property in person – and there’s always the chance they could do a poor job with upkeep or management.
• Whether you’re managing a property in person or not, there’s always a risk that things like vacancies and potentially depreciating property values could hurt your profits. Investing, even in things considered as ‘low-risk’ as real estate, can always potentially become risky, depending on the state of the market.