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.
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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.
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.
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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