What is Passive Real Estate Investment?

Real Estate Offering Update: CityVest Has Launched Catalyst Access Fund With 20%-25% Target Annual Returns (Accredited Investors Only).

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. 

get started securely through CityVest’s website
Disclosure: Must be accredited investing a minimum of $25,000.
Fees
0.75%
Minimum Investment
$25,000
1 Minute Review

CityVest is a web-based real estate investment platform that was established to give small-to-medium-sized investors access to real estate investment opportunities that typically require 6-figure minimum investments. CityVest does this by pooling multiple investor contributions into 1 bundle large enough to satisfy the minimum investment requirements of the best institutional private equity real estate investment funds.

Best For
  • Individual investors seeking access to institutional investments
  • Experienced investors looking to diversify their portfolio
  • Investors seeking investments with strong due diligence and screening
Pros
  • Access to high-performance institutional funds
  • High returns
  • Intense vetting of investment opportunities
  • Third-party due diligence on all funds
  • No registration needed to review investment opportunities
  • Quarterly distributions
Cons
  • Only available to accredited investors
  • Not a lot of investor control of fund options
Get started securely through Streitwise’s website
Fees
2% – 3%
Minimum Investment
$5,000
1 Minute Review

Streitwise is a unique online real estate investing platform that was designed to give investors, both big and small, an equal opportunity to invest in real estate. At its core, Streitwise is a real estate investment trust, but it’s one of the few online real estate investing platforms that is available to non-accredited investors.

Best For
  • Investors looking to diversify
  • Investors with less than $200k in annual income
  • Passive traders
Pros
  • Consistent quarterly dividends
  • Low, transparent fees
  • Low investment minimum
  • Convenient and easy to use
Cons
  • Limited offerings
Get Started securely through Arrived Homes’s website
Fees
1% asset management fee
Minimum Investment
$100
1 Minute Review

Arrived Homes is a real estate investment platform that focuses on building wealth through investing in rental properties. While most real estate platforms and REITs focus on commercial properties, Arrived Homes focuses on single-family homes as its source of rental income.

This focus on smaller properties allows Arrived Homes to sell ownership shares on individual properties to non-accredited investors with buy-ins as low as $100. Learn more about Arrived Homes with Benzinga’s review.

Best For
  • Small- to medium-sized investors
  • Investors interested in rental income
  • Investors looking to diversify
Pros
  • Buy-ins as low as $100
  • Open to non-accredited investors
  • Offers ownership shares in real property (and all the tax benefits)
  • Multiple ways to earn dividends (rental income and property appreciation)
  • Great way to diversify portfolio
  • Open to self-directed individual retirement accounts (IRAs)
Cons
  • Long hold periods
  • No secondary market to liquidate shares
Get started securely through CrowdStreet’s website
Fees
1% – 1.75%
Minimum Investment
$25,000
1 Minute Review

Crowdstreet is an online real estate investment platform that lets investors choose from a wide range of real estate investment offerings to crowdfund. Crowdstreet investors are free to buy into managed funds, individual buildings or even build a bespoke investment portfolio that includes both kinds of deals.

CrowdStreet’s platform has a diverse range of property types, ranging from multifamily to office, industrial, self-storage and others.

 

Best For
  • Accredited investors
  • Long-term investors
  • Investors looking to diversify from stocks
Pros
  • User-friendly interface
  • Diverse investment offerings
  • Great investor resources
  • Proven performance history
  • Many offerings eligible for inclusion in self-directed IRA
Cons
  • Accredited investors only
  • Most offerings require a $25,000 minimum investment
Get started securely through Yieldstreet’s website
Fees
average 1-2%
Minimum Investment
$500
1 Minute Review

Yieldstreet is an online investment platform that specializes in alternative investment offerings designed to generate passive income and wealth for investors. The platform offers a 1-stop shop for a range of alternative investments ranging from real estate to structured notes and even art collections.

Best For
  • Accredited investors looking to diversify
  • Alternative investments to stocks and bonds
  • Investors looking for passive income
Pros
  • Easy-to-use platform
  • Carefully selected offerings
  • Excellent mobile app
  • Full spectrum of alternative offerings
  • Options for non-accredited investors
Cons
  • Majority of investments only open to accredited investors

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. 

Accelerate Your Wealth

Arrived Homes allows retail investors to buy shares of individual rental properties for as little as $100. Arrived Homes acquires properties in some of the fastest-growing rental markets in the country, then sells shares to individual investors who simply collect passive income while waiting for the property to appreciate in value over 5 to 7 years. When the time is right, Arrived Homes sells the property so investors can cash in on the equity they've gained over time. Offerings are available to non-accredited investors. Sign up for an account on Arrived Homes to browse available properties and add real estate to your portfolio today.