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Passive Real Estate Investing: How to Get Started
For a long time, real estate investing has been a popular way to generate wealth and build a diverse investment portfolio. For many people, the idea of real estate investing is probably linked to buying or renting out houses or property for profit.
However, the reality is that actively managing real estate investments can be time-consuming, complex and require specialized knowledge. Passive real estate investing offers an alternative approach that allows investors to gain exposure to the real estate market without the challenges of active management.
If you're a real estate investor who would like an investment option that is not too demanding and more flexible, this blog will provide you with the information you need to make informed decisions and potentially reap the rewards of passive real estate investing.
- For many investors, real estate investing is largely linked to buying or renting out houses or property for profit. However, passive real estate investing enables investors to gain exposure to the real estate market without the challenges of active management
- Passive real estate investing refers to a strategy where an investor puts money into a real estate project or investment opportunity without actively managing the property themselves
- The three broad categories under passive real estate investing are active real estate investing, passive real estate investing and active real estate investing with passive management
- Some of the ways to invest in real estate for passive income include crowdfunding, investing in REITs, real estate funds and remote ownership
- Some pros of passive real estate investing include lower initial investment cost, potential to generate steady income and diversification of your investment portfolio
- Some cons of passive real estate investing include limited control for investors over the management and operation of their investments, lower returns as compared to active real estate investing and operational risks such as vacancy rates, maintenance costs and tenant turnover
- Before getting into passive real estate investing, be sure to conduct thorough due diligence and seek professional advice from a financial advisor or real estate expert
The contents of this article are for educational purposes only. They are not intended to be a source of professional financial advice. You will find experts on financial planning, financial management, and real estate here. More on disclaimers here.
What is Passive Real Estate Investing?
Passive real estate investing refers to a strategy where an investor puts money into a real estate project or investment opportunity without actively managing the property themselves. Some of the ways in which investors can passively invest in real estate include through real estate investment trusts (REITs), remote ownership, crowdfunding and real estate funds.
With these types of investments, investors can be able to earn real estate passive income without being physically involved with any properties or being the landlord or property manager of the different properties.
Categories of Real Estate Investing
Real estate investing can be widely categorized into three levels depending on the level of investor involvement. The three categories are:
- Active real estate investing
- Passive real estate investing
- Active real estate investing with passive management
Active Real Estate Investing
Active real estate investing refers to a strategy in which an investor actively seeks out and acquires investment properties, manages them and takes a hands-on approach to maximizing their return on investment. Buying and or managing rentals and fixing and flipping properties are examples that fall under this category.
This approach may involve identifying undervalued properties, negotiating deals, securing financing, overseeing renovations or improvements and leasing or selling the properties. Active real estate investing typically requires a significant amount of time, effort and expertise, and can be a full-time job for some investors.
Passive Real Estate Investing
Passive real estate investing is whereby an investor puts money into real estate investments without actively managing the properties themselves.
Passive investors typically invest in real estate through REITs (Real Estate Investment Trusts), real estate crowdfunding platforms, syndications or other investment vehicles where they can put their money and receive returns without directly dealing with the day-to-day management of properties.
Passive real estate investing is often seen as a way for investors to benefit from the potential returns of real estate investing without the time commitment or specialized knowledge required for active investing. However, passive investing may still require careful research and analysis to identify the best investment opportunities and mitigate risk.
Active Real Estate Investing With Passive Management
Active real estate investing with passive management refers to a hybrid investment strategy that combines elements of both active and passive investing. In this approach, the investor takes an active role in identifying and acquiring investment properties, but then hires a third-party property manager to handle the day-to-day management tasks, such as leasing, maintenance and tenant relations.
This allows the investor to remain actively involved in the investment process while also enjoying the benefits of passive income and reduced time commitment. Active real estate investing with passive management may be a good option for investors who have the skills and expertise to identify and acquire profitable properties, but prefer not to handle the hands-on management responsibilities.
How to Invest in Real Estate for Passive Income
If you're just getting started in passive real estate investment, here are 4 popular investment opportunities that you can take advantage of.
Crowdfunding has become a popular way to invest in passive real estate for income. Real estate crowdfunding platforms allow investors to pool their money together to invest in large commercial or residential real estate projects. These platforms often offer investors the opportunity to invest in a diversified portfolio of real estate properties, including office buildings, apartment complexes, shopping centers and other commercial properties.
Investors can choose from a variety of crowdfunding investment options, such as equity crowdfunding, debt crowdfunding or hybrid crowdfunding models. In equity crowdfunding, investors receive a share of ownership in the property and a portion of the profits when it is sold or generates rental income. In debt crowdfunding, investors receive a fixed interest rate and a regular stream of income from the property's rental payments. Hybrid models combine both equity and debt investments.
REITs (Real Estate Investment Trusts) are a popular way to invest in passive real estate for income. A REIT is a company that owns, operates or finances income-producing real estate, such as office buildings, apartment complexes, hotels and shopping centers. REITs typically generate income from rental payments or by selling properties at a profit.
Investing in REITs can provide investors with a range of benefits. This is because REITs are required to distribute at least 90% of their taxable income to shareholders in the form of dividends, which means that investors can receive a reliable stream of passive income from their investments. Additionally, REITs are professionally managed, which means that investors do not need to have any specialized knowledge or experience to invest in them.
Real Estate Funds
Real estate funds are another popular way to invest in passive real estate for income. Real estate funds are professionally managed investment vehicles that pool money from multiple investors to invest in a diversified portfolio of real estate properties. These funds can invest in a range of real estate assets, such as commercial buildings, residential properties and industrial warehouses.
There are several types of real estate funds, including private equity funds, hedge funds, mutual funds and exchange-traded funds (ETFs). Private equity funds and hedge funds typically require large minimum investments and are only available to accredited investors. Mutual funds and ETFs are more accessible and can be bought and sold like stocks on exchanges.
Remote ownership is a way to invest in passive real estate for income, and it has become more popular due to technological advancements that allow investors to manage their properties remotely. Remote ownership involves investing in rental properties in different locations and hiring a local property management company to handle the day-to-day management tasks, such as tenant relations, maintenance and rent collection.
Remote ownership allows investors to own and manage properties in different geographic locations without having to be physically present. This can offer several advantages, such as access to a wider range of investment opportunities, the ability to diversify your investment portfolio geographically and the opportunity to benefit from different market conditions in different locations.
Pros and Cons of Passive Real Estate Investing
Passive real estate investing has both advantages and disadvantages. Here are some of the key pros and cons.
- Lower initial investment cost. Compared to actively investing in real estate, passive investing requires less capital upfront. By investing in the different funds, investors can gain exposure to a diversified portfolio of real estate assets without the need to buy properties outright, which often requires a significant amount of capital.
- Professional management. Passive real estate investments are often professionally managed, which means that investors do not need to have any specialized knowledge or experience to invest in them.
- Passive income. One of the biggest advantages of passive real estate investing is the potential to generate steady income through rental payments, dividends from REITs, or distributions from real estate funds.
- Diversification. Passive real estate investing can offer diversification benefits to an investment portfolio, as it tends to have a low correlation with other asset classes, such as stocks and bonds.
- Limited control. Passive real estate investors generally have limited control over the management and operation of their investments, which means that they may not have direct control over key decisions such as property management, leasing and maintenance.
- Less profitable. While passive real estate investments provide investors with exposure to a diversified portfolio of assets, the returns generated by these investments may be lower compared to active investing, where an investor purchases a property and manages it themselves.
- Market risk: Real estate investments are subject to market risk, and their value can be impacted by factors such as changes in interest rates, supply and demand dynamics and economic conditions.
- Operational risk: Real estate investments can also be subject to operational risks, such as vacancy rates, maintenance costs and tenant turnover.
Should You Invest in Passive Real Estate?
Whether or not to invest in passive real estate ultimately depends on your personal investment goals, risk tolerance and financial situation. Passive real estate investing can provide a steady stream of income and diversification benefits to an investment portfolio, while also requiring less time and effort than active real estate investing.
However, passive real estate investments are subject to market and operational risks, and may require significant upfront capital. It is important to carefully evaluate the potential benefits of being a passive real estate investor and risks of each investment opportunity, and to conduct thorough due diligence before making any investment decisions. It may also be helpful to seek professional advice from a financial advisor or real estate expert.
Bay Street Capital Holdings
Bay Street Capital Holdings is an independent Black-owned investment advisory and wealth management firm that is based in Palo Alto, CA. The firm was founded by William Huston founded Bay Street after 13 years of supporting the United States' largest retirement plan ($650B) Thrift Savings Plan.
In 2021, he was recognized as Investopedia’s Top 100 Financial Advisors. Bay Street was also selected as a finalist out of over 900 firms across the US in the category of Asset Manager for Corporate Social Responsibility (CSR). In California, only two black-owned firms out of nineteen firms received this recognition.
Bay Street manages portfolios with the goal of maintaining and increasing total assets and income with a high priority on managing total risk and volatility. The firm was founded to advocate for diverse and emerging fund managers and entrepreneurs.