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What is Passive Real Estate Investment?

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House flippers, landlords and homeowners are no strangers to hard work. Just ask any rental property owner who has had to get up at 3 a.m. to fix a leaking hot water pipe. Even with a property manager, real estate investment usually involves dealing with one problem after another.

But, the potential reward of decent equity returns keeps most investors in the game. A recent study revealed that the rate of return on real estate investment is historically higher than stocks and bonds. What if you could enjoy the potential gains from real estate investing without getting your hands dirty? Passive real estate investment may be the answer for you.

Passive Real Estate Investment Put Simply

Passive real estate investment allows an investor the opportunity to financially profit from a real estate investment without being involved in the day-to-day operations of managing the asset. It’s a silent partner type of arrangement. 

Don’t let the word passive fool you. You must do your due diligence and commit real money for this investment. It takes a substantial time commitment to thoroughly evaluate your investment. You must keep track of your asset’s progress by reviewing financial statements and quarterly reports. 

Ways to Passively Invest in Real Estate

A passive real estate investment opens up this market to people who prefer not to be active investors of rental, business or residential properties. If this describes your preference, you can diversify your portfolio with real estate interests by using these methods.

Crowdfunding

Real estate development companies often raise money for property development projects by recruiting investors through crowdfunding. Also, people label crowdfunding as peer-to-peer lending (P2P). They use the internet and social platforms to tempt investors to commit as little as $500 to their projects. By pooling the funds from crowdfunding investors, real estate companies can raise large sums of money. Crowdfunding helps you limit your risk exposure to the amount of money you commit.

Here are a few good crowdfunding websites:

  • PeerStreet: Founder and COO Brett Crosby claims PeerStreet unaccredited investors earn consistent returns from debt-based notes. He says real estate debt returns generally outperform bonds and equities. Most investors agree. To buy in, you only have to commit $1,000. 
  • Fundrise: This online platform has a very hands-on environment. Since you manage your Fundrise portfolio, you pay a small 1% commission fee. Plus, the investment minimum is $500.
  • EquityMultiple: The company attracts more experienced and affluent investors. You must be an accredited real estate investor with a net worth of at least $1 million or an annual income of $200,000. In return, you receive the backing of an established real estate company, Mission Capital.

Crowdfunding offers a convenient way to invest a little and possibly get a lot. But, be aware that real estate is inherently risky and crowdfunding is a new investment venue. Read about the best ways to invest before you make any investment decisions. 

Buying REIT Shares

Real estate investment trusts (REITs) provide an excellent way to invest in real estate assets via the stock market. REITs operate like a mutual fund. These funds have managers who invest capital in commercial real estate portfolios. And 90% of a REIT’s taxable income must go to its shareholders. If you desire income from your investments, this is an attractive investment option. Also, it appeals to capital appreciation-minded investors. 

REITs specialize in all types of commercial real estate such as hotels, office complexes, warehouses and medical centers. REITs own around $2 trillion in stock exchange-listed assets. They present an opportunity for investors who normally wouldn’t have the resources to invest in these types of projects. To help you choose the appropriate REIT for your needs, read about the best investment firms.

Team with an Active Investor

Especially with a rental property, teaming with an active partner can be beneficial to both of you. The arrangement allows you to get a good return on your money without straining your time or your neck. The active partner gains more leverage with the extra capital. Your financial gain would be a percentage of the rental income and a share of the profit from the eventual sale of the property. Also, your risks are much lower because the active partner is totally responsible for all losses. You only stand to lose the money you invested. 

Minimum Investment
$500
Fees
No management fees
Get started securely through Diversyfund’s website
Minimum Investment
$500
Fees
No management fees
1 Minute Review

DiversyFund isn’t your average crowdfunding platform. You’ll find that the company puts a twist on the traditional everyday crowdfunding platform, beyond anything you can find online with a simple Google search. You only have to look under DiversyFund’s skin one layer to surmise that DiversyFund is a conscientious developer and sponsor and helps hedge risk through improved vetting.

DiversyFund offers a multifamily real estate investment trust, the DiversyFund Growth REIT, and its main goals are to increase cash flow and resale value. It’ll automatically give you access to multi-million dollar real estate assets.

Best For
  • Those looking for an alternative investment beyond stocks and bonds
  • Individuals who aren’t sure they want to be landlords in the traditional sense
  • Investors who aren’t accredited
Pros
  • Only need to pony up $500 to get started
  • Open to investors all over the world
  • No expensive broker fees
Cons
  • You’ll only be able to access “blind pool” investments, which means that you can’t opt out of specific properties
  • There’s only one real investment option, the DiversyFund Growth REIT
Minimum Investment
$1,000
Fees
average 1-2%
Get started securely through Yieldstreet’s website
Minimum Investment
$1,000
Fees
average 1-2%
1 Minute Review

Yieldstreet is an alternative investment platform that allows you to access unique, diversified and expert-reviewed investments. From real estate offerings to works of art, Yieldstreet offers investments that have low correlations with the general markets, meaning they can act as a new source of portfolio diversity.

Yieldstreet’s platform is easy to initiate and use — open an account in just a few minutes and begin browsing available investments before your account is fully verified. Due diligence information is easy to find and clearly laid out, and most investments include additional resources to learn more about the investment’s industry or category. Although the majority of investments are only open to accredited investors, anyone can invest in Yieldstreet’s Prism Fund.

Best For
  • Passive income generation
  • Accredited investors
  • New investors looking for an intuitive platform
Pros
  • Wide range of expert-reviewed alternative investments
  • Investments that are pre-funded by Yieldstreet
  • Prism Fund open to non-accredited investors
Cons
  • Majority of investments only open to accredited investors
Minimum Investment
$5,000
Fees
Between 8% and 10% of the purchase price
Get started securely through Roofstock’s website
Minimum Investment
$5,000
Fees
Between 8% and 10% of the purchase price
1 Minute Review

Roofstock is a registered real estate broker and marketplace specializing in single-family rental properties. Unlike its competitors, Roofstock isn’t selling shares of properties through trusts or LLCs — they’re connecting buyers and sellers directly. Roofstock properties are carefully vetted by a qualified home inspector and come with a rental income guarantee. That’s right, Roofstock will pay you rent even if your property stays vacant.

Financial data on each property is available even to those who are not clients and nonaccredited investors are welcome to join free of charge. Cash and financing options are available when making a purchase, but Roofstock will tack on their own fees in addition to closing costs.

As the solitary owner of your property, you’ll be expected to fund repairs out of your own pocket. Still, Roofstock is a great way to get a foot in the door of the real estate industry and their fees are much lower than most of the competition.

Best For
  • Nonaccredited investors
  • Real estate investors with limited capital
  • Investors looking for income through rental properties
Pros
  • Free to sign up
  • No investment minimum
  • Ownership of real assets
  • Low fees 30-day money back guarantee
Cons
  • Single-family homes only
  • Need to finance repairs yourself
  • Requires down payments
Minimum Investment
$50,000 *Origin Investments is for Accredited Investors only
Fees
1.25% per year
Get started securely through Origin Investments’s website
Minimum Investment
$50,000 *Origin Investments is for Accredited Investors only
Fees
1.25% per year
1 Minute Review

Origin Investments is a real estate investment company that has leveraged technology to make investing in institutional-quality private real estate more accessible. Origin Investments places an emphasis on transparency, and fund information and documents are easy to find in their investor web portal. Getting started with Origin is equally as simple, though you’ll need to be an accredited investor to join.

Best For
  • Accredited investors
Pros
  • Your real estate investment is managed by experienced real estate fund managers who have executed more than $1 billion in transactions and resulted in 0 losses across 43 deals.
  • Origin has “boots on the ground” in their target investment markets, providing access to off-market deals
  • Origin principals have invested $56 million of personal capital alongside investors, to ensure alignment of interests.
  • Beginner-friendly platform is easy to operate
  • A personal Origin representative is provided to every investor for personalized customer service
Cons
  • Open to accredited investors only
Minimum Investment
$10,000
Fees
1% – 1.75%
Get started securely through CrowdStreet’s website
Minimum Investment
$10,000
Fees
1% – 1.75%
1 Minute Review

CrowdStreet is a commercial real estate investing platform where people can invest directly in commercial projects. Unlike a brokerage firm, CrowdStreet isn’t a middleman. Instead, the platform acts as a marketplace where investors can pick and choose the best deals for their time horizon and strategy.

Available investments range from family living spaces to office buildings to storage facilities and investors can sign up for a free membership. Your investment options are limited to what’s live on the Marketplace and you’ll need capital to build a diverse real estate portfolio. Only accredited investors can access deals through CrowdStreet.

Best For
  • Investors looking for diversification away from stocks
  • Real estate investors interested in new opportunities
  • Accredited investors with lots of capital at their disposal
Pros
  • Unique opportunities available
  • Makes real estate accessible and understandable
  • Investors can devote capital to both debt and equity offerings
  • Offers quality education materials and answers to FAQs
Cons
  • Real estate is highly illiquid
  • Most properties require a minimum $25,000 investment
  • You’re limited to what’s on the CrowdStreet Marketplace
Minimum Investment
$500
Fees
0.85% asset management fee per year
Get started securely through Fundrise’s website
Minimum Investment
$500
Fees
0.85% asset management fee per year
1 Minute Review

Fundrise, a real estate investment platform, allows small investors to gain exposure to a diversified portfolio of real estate projects hand-picked by the Fundrise team. Investors can choose between a starter plan and three advanced plans, all designed to meet certain investing goals. Each plan gives you an exposure to a specific portfolio which comes in a form of eREITs and eFunds, custom-made products which are not traded on security exchanges.

Best For
  • Small real estate investors
  • Passive investors
  • Long-term investors
  • Beginners
Pros
  • Allows small investors to get exposure to commercial real estate
  • Diversification in the real estate sector
  • Goal-oriented investing
  • Relatively low fees
  • 90-day guarantee
Cons
  • Liquidity issues as eREITs and eFunds are not exchange traded

Who Should Invest in Real Estate Passively?

Is a passive real estate investment right for you? It’s not right for everybody. Consider these proposed requirements:

  • You must know real estate. It is important to have a working knowledge of any field you plan to invest in. If you don’t, you should read as much as you can about real estate. Taking real estate classes is a good idea. 
  • You can’t be a micromanager. Real estate fund managers and property managers do not invite or expect your input.  If you are mainly a stock investor, this shouldn’t be hard for you.
  • If you are not afraid to make mistakes, you may be suitable for passive real estate investing. Not every problem is fixable. No situation is exactly the same. You must be willing to face the consequences of your mistakes and learn from them.

Pros of Passive Real Estate Investing

Of course, passive income is the best part about passive real estate investing. Having your money work for you is always a big plus. These are some good reasons to go passive: 

  • Relatively safe: Passive real estate investing allows you to pool your money into a fund that involves multiple properties. This diversifies your portfolio and dilutes your risks. You avoid the pitfalls of not being a real estate professional by permitting experienced managers to handle buying, leasing and overseeing operations. They know the proper pricing for rentals and property sales. 
  • Time saver: This type of investing frees up your time to do whatever you do best. Once you have committed to the investment, you can relax.
  • Lower starting capital: Can you think of another way to invest in multiple properties on a shoestring budget? For as little as $500, you can be part of the real estate game. You share the financing with others. This gives you a chance to receive good earnings with a minimal cash output.

Cons of Passive Real Estate Investing

Passive real estate investing has its unique set of disadvantages. But, some of the cons come with the realities of investing in real estate. Here are a few: 

  • Lack of liquidity: Since you will have no control over the sale of the properties, your money is not available to you at your discretion. 
  • Small piece of the profit: Active investors are going to get the lion’s share of the asset earnings. Basically, you are paying them to do the heavy lifting. The active partner gets a majority of the earning from the rental income and the sale. On the other hand, REITs take a smaller 10% bite out of the properties’ taxable earnings.
  • Loss of control: You have no control over rental policy, renovations, tenant selection or the marketing of the investment property. You must have complete faith in the management team. If you think they are doing something stupid, you have to accept it as part of the deal. 

Earning Passively Can Pay

A passive income investment is a good way to possibly earn decent returns on your money without the usual toil of property ownership. Pooled funding lowers your risks.

Real estate professionals make the hard decisions, however, it doesn’t come without its compromises and limitations. Failure is a possibility, especially if you don’t do your due diligence. 

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