Many investors stick with stocks and bonds, thinking that real estate is too time-consuming and requires too much specialized knowledge. But with today’s passive real estate investing strategies, you can invest in the real estate market without committing your time and energy to learning the industry and managing your assets.
In this article, we’re breaking down passive real estate investing for 2024. We’ll explain:
- What passive real estate investing is
- The pros and cons of passive real estate investing,
- Passive real estate investment options, and
- How you can get started today!
What is Passive Real Estate Investing?
Passive real estate investing is when you strategically choose property investment models that require very little of your own time and energy.
Consider, for example, buy-and-hold rental properties, which are a classic example of passive real estate investing. The idea is that you invest your time and money upfront, researching the market, choosing the right property, and potentially renovating to prepare for the rental market. Then, once the property is occupied, your role turns passive. You earn the financial benefits of the investment without spending time each week actively managing the property.
But let’s take this example a step further. If you hire a property management company to handle the maintenance requests, lease renewals, move-ins/outs, and rent collections, your rental property now becomes almost completely passive. You don’t have to invest your time or energy in the month-to-month management of the property. This is the level of passivity that many of today’s investors are looking for.
In the age of connectivity, most of us are busier than ever before. We’re always accessible, which means we’re always being pulled in a million different directions. Wouldn’t it be nice to know that your investments are just taking care of themselves?
Passive Real Estate Investing Vs. Active Real Estate Investing
Is your real estate investment passive or active? Here are a few general rules to differentiate between the two:
- Active real estate investments typically require the investor to live nearby so they can physically visit the property when necessary. Passive investors generally aren’t needed on-site. Some may never even visit their properties in person.
- Active real estate investments require more time and effort from the investor. In our buy-and-hold example, the property owner who manages the assets themselves would be an active investor. A passive investor would be more interested in hiring a property manager to handle the operations of the property.
- Active real estate investments typically offer greater control for the investor, while passive investments offer less control.
- Active investments require more experience, knowledge, and skill from the investor. Passive investments leverage the experience, knowledge, and skills of professionals.
Pros and Cons of Passive Real Estate Investing?
The benefits of passive real estate investing include:
- Very little time commitment. You invest some time upfront in choosing your investments, then you can essentially go about your life, spending your time on other ventures.
- There’s no experience or specialized knowledge needed. Since passive real estate investing relies on the expertise of professionals, you don’t have to bring any prior experience or skill to the project.
- Less work than active investments. There’s only so much hard work you can fit into your life. Passive investing allows you to save your mental and physical energy for your family, friends, passions, and career.
- May offer a lower minimum investment amount. Active real estate investments, like owning and managing your own portfolio of properties, require substantial upfront and ongoing investments. However, the passive real estate investments we’ll look at in this article might require less than $30,000.
- May offer higher returns. Yes, if you’re hiring a professional to handle your investments, they’ll likely be compensated from the profits. On the other hand, their expertise and connections may help you net higher returns than you could have achieved alone.
Here are the potential downsides of passive real estate investing:
- Less control. Passive real estate investing means trusting the professionals to handle your real estate portfolio.
- Risk of limited transparency. Some passive investments offer limited transparency. We’ll discuss this more throughout this article.
Three Prime Examples of Passive Real Estate Investing
Let’s look at more examples of passive real estate investing, outside of the traditional buy-and-hold rental. In our article, How to Create Passive Income from Real Estate, we explored seven specific methods for creating passive income streams, and we want to give a few examples of those passive income investments here.
1. REITs
Real estate investment trusts (REITs) are companies that own income-producing real estate. You can buy a share of a REIT to share in the proceeds, which are paid out to investors as dividends.
All you have to do is choose the REIT(s) you want to invest in. Then, every quarter, you’ll receive dividends, which you can either use to supplement your income or reinvest to take advantage of compounding interest.
One notable benefit of REITs is automatic diversification. Each REIT holds multiple properties, sometimes hundreds of properties. So if one property struggles, the other properties can bolster the performance of the entire portfolio.
One notable downside of REITs is the lack of transparency. You might not even know which properties are included in your portfolio. So you might be investing in properties you would never choose on your own. And you might do it without knowing it. Furthermore, the automatic diversification of REITs makes it impossible to remove underperforming assets from your portfolio.
2. Real Estate Crowdfunding
Real estate crowdfunding is when multiple investors join together to fund a specific real estate project. The project could be anything from a single-home flip to a ground-up multi-family development. And, the whole deal is managed by the crowdfunding platform or a sponsor who will handle the details for you, making this investment completely passive.
With crowdfunding, you can potentially buy into a multi-million-dollar deal for under $30,000. This creates an incredible opportunity for investors with limited capital to gain access to impressive deals. Additionally, if you have funds available, you can spread them among multiple projects to create a diversified portfolio that’s more curated than a REIT.
One potential downside of crowdfunding is that the ownership structure can be a bit loose. In some cases, investors are treated as owners, holding a stake in the entity that owns the real estate. In other cases, investors are treated as debt holders, without any ownership stake. And it’s not always clear which structure investors are entering into. So it’s important to choose your crowdfunding service carefully.
3. Real Estate Syndication
Real estate syndication is extremely similar to crowdfunding. In fact, many investors have a hard time understanding the differences between syndication and crowdfunding. Syndication essentially works the same way as crowdfunding and provides all the same benefits. But, unlike crowdfunding, syndication has a clear ownership structure in which investors become members of the LLC or trust that owns the property. So, if ownership of the underlying real estate is important to you, syndication is the better option.
As with crowdfunding, syndication projects are handled by a professional, called a real estate sponsor. This is the party responsible for handling the day-to-day details, including finding and vetting new deals, supervising construction, making architectural and design decisions, working with the local building permit office, and marketing the property for rent or sale. A good sponsor with a strong investment strategy can potentially provide annualized passive returns of over 20%!
Passive Real Estate Investing FAQs
Is real estate a good passive investment?
Absolutely! With options like REITs, crowdfunding, syndication, and professionally managed rentals, there is impressive return potential in passive real estate investing.
What is the best passive real estate investment?
The “best passive real estate investment” depends on your financial goals. For example, if you’re looking for ongoing cash flow, you might find that a buy-and-hold rental (whether owned directly or through crowdfunding/syndication) is the best option for you. If you’re looking for a short-term option, a crowdfunded fix-and-slip project might suit you well.
Do active real estate investments have higher returns than passive investments?
Not necessarily. Some financial advisors will warn that passive real estate investments may come with higher fees since there are professional managers to pay. And this is true. However, it’s also common for professionally managed passive investments to outperform self-managed active investments because the professionals have access to resources that individual investors do not. These resources can potentially lead to higher net yields for investors.
Start Building Passive Income through Real Estate Today
Gatsby Investment makes it easy to choose a real estate crowdfunding/syndication project and place your investment. With our commitment to transparency, investors get to view all the details for each investment opportunity. You can see the exact property address, read up on the complete project plan, and review the projected financials.
You’re also informed as your investment progresses. Your online dashboard will show you a progress bar so you can track the project from start to finish. We also proudly publish the final financials side-by-side with the original financial projections so you can see how our estimates compare with our results. Our track record speaks for itself!
Are you ready to earn all the benefits of passive real estate investing? Learn more about how it works and choose your passive real estate investment(s) today!