All About Passive Real Estate Investing

By
Telukunta Sai Kinnera,
All About Passive Real Estate Investing

Real estate is an extraordinary way to make money. In fact, real estate is the primary source that has made fortunes to many multi-millionaires.

However, the active methods of real estate investing, like owning and managing rental properties or fixing and flipping houses, aren't suitable for every individual. If someone wants to invest their money in real estate and active investments don't sound appealing to them, there are other ways to invest without actually requiring them to play an active role. And those are passive real estate investments.

Passive Real Estate Investing

To put it in simpler terms, passive real estate investing is investing in real estate without much hands-on effort and work or active participation from the investor.

It is of two types - direct and indirect.

Direct Passive Investing

When it comes to this type of investing, an investor will have to purchase a property or portion of a property and give it on rent. Often, investors that purchase a property will hire a property management company to take care of and maintain their property. Post the purchase of property, hiring a property management company allows investors to be hands-off with managing the property. Hence, justifies the title ‘passive real estate investing’.

Indirect Passive Investing

Whereas, indirect passive real estate investing is a process where individuals put their money in a Real Estate Investment Trust (REIT) or a real estate related mutual fund (MF). Investors collect their passive income in the form of returns or dividends from funds. This investing is considered passive because there is no daily management needed and it’s considered indirect because it doesn’t deal with a certain specific piece of real estate.

Best Passive Real Estate Investing Options

There are quite a good number of passive real estate investing options to get started. Here are a few of them.

Real Estate Investment Trust (REIT)

The best way to invest in real estate properties through the stock market is to purchase shares of a REIT. Assume REITs like mutual funds - investors purchase shares in a REIT and the REITs further invest capital (the pooled amount) in a portfolio of commercial properties.

The best thing to know as an investor is that REITs must distribute at least 90% of their taxable income to shareholders, as directed by SEBI. So, this makes them excellent choices for income-seeking investors and long-term capital appreciation seekers. And since they are tradable like any other stocks, REITs present themselves as an excellent fit for retirement accounts like IRAs.

Real Estate Crowdfunding

Real estate crowdfunding refers to a cluster of investors who contribute money from each of their sides to become part of a real estate deal.

Sometimes crowdfunding also works to help a real estate investor who might be having a lead for a lucrative deal but not the funds to invest in it. This is where crowdfunding comes as a savior as other investors gather their resources and help the active real estate investor to complete a project and sell it, mostly at a high-profit margin.

Real estate crowdfunding is typically managed or operated through several online platforms where individuals can own property and also earn profits with only a few clicks. Investors visit the online platform and their offerings and browse through various opportunities that appeal to them. Once they are done selecting an investment that satisfies their requirements, their funds are summed with other investors and the investment deal will be closed. Investors then start to analyze the performance of their investment and collect the passive income that it yields.

Real Estate Funds

Real estate funds are types of mutual funds(MFs) that invest exclusively in real estate. Many real estate funds put their money in REITs. They present certain benefits that may seem appealing to passive investors. Also, they offer greater diversification, which is intended to mitigate risk and create a higher potential for returns. A major part of a real estate fund is most often invested in commercial properties like apartment complexes, offices, retail shops, and land.

Collaborate with an Active Investor

Especially with a rental property, teaming with an active partner can be beneficial to both- the investor and the active partner. This arrangement allows investors to get handsome returns on the invested money without having much work on their hands. The active partner generates more leverage with the extra capital i.e of the investor’s. Investor’s financial gain would be a certain percentage of the rental income and a share profit from the eventual sale of the property. Also, investors' risks are much lower because the active partner is completely responsible for all losses. Investors only stand to lose the money invested and nothing more than that.

Pros of Passive Real Estate Investing

The best part about passive real estate investing is that it yields passive income. Having money to work for oneself is always a big plus.

Few of the advantages this sector of real estate offers are :

Comparatively Safe

Passive real estate investing allows inventors to pool their money into a fund that will involve multiple properties. This diversifies investors’ portfolios and dilutes their risks. Investors can avoid the pitfalls of not being a professional in the real estate field by permitting experienced managers to handle the transactions like buying, leasing and, overseeing operations as they will know better about the proper pricing for rentals and property sales.

Time Saver

This type of investing frees up an investor's time to do whatever he/she does best. Once they get committed to an investment, they can simply relax.

Lower Investment Capital

There’s no other way to invest in multiple properties on a shoestring budget except for this part of real estate. And that’s being made possible as each investor shares the financing with others. This further gives them a chance to receive substantial earnings with a minimal cash output.

Cons of Passive Real Estate Investing

Passive real estate investing has its own set of concerns. But, some of them come with the realities of real estate investing. Here are a few:

Lack of Liquidity

Since passive investors will have no control over the sale of the properties, their money will not be available to them at their discretion.

Small Slice of the Profit

Out of the investment, active investors will always get the lion’s share of the asset earnings which includes the income from rentals and sale. On the other hand, REITs also take a 10% bite out of the properties’ taxable earnings. So, this makes it clear that passive investors would be receiving a smaller slice of the profit or the income from the total investment earnings.

Loss of Control

Passive investors will have no control over rental policy, renovations, tenant selection, or even the marketing of the investment property. They must have complete faith in the management team and even be able to accept the losses if incurred by the management company or the active player.

But it’s also not advisable to shun the option completely as it’s worth it all, owing to the fact that its earnings (including the rents and sale profit share) are not away from the best for a passive investment option.

Bottom Line

Passive real estate investing is a great way to create wealth over the long run without the hassles of actually having to hold the responsibilities of being someone's landlord or even manage a construction project. But having said that, it’s also important to note that passive investing requires a certain degree of homework, without which it’s not advisable to take any further steps.

Assetmonk is an online investing platform that offers a range of curated properties with high growth potential out of which YIELD is a passive investment option. Consider checking it out as it is worth all your effort and time.

FAQs:

Passive real estate investing, in simpler terms, is investing in real estate where the investor does not have too much hands-on work or active participation in the investment being made.

Direct passive real estate investing

Investors purchase the property directly and post the purchase, they hire a property management company that allows them to be hands-off with managing the property. Hence, it is called the ‘direct passive real estate investing’.

Indirect passive real estate investing

Investing this way is considered passive because investors need not manage the property daily and it’s considered indirect because it doesn’t deal with a certain specific segment of real estate. For example, investing in Real Estate Investment Trust (REIT) or a real estate related mutual fund (MF). Investors, here, don’t directly purchase a property but the REITs or RE MFs (in which they invested in) invest in real estate properties. Thus, the term ‘indirect passive real estate investing’.

  1. REITs
  2. Crowdfunding
  3. Real Estate Funds
  4. Collabrate with an active player