Real estate investment is a great option for accumulating wealth and generating passive income.
However, the complexity and perceived risk involved can deter many people from investing in this field.
But passive real estate investing offers a simple, low-risk alternative that allows you to invest in real estate without owning properties or directly managing properties or tenants. It lets you enjoy the benefits of real estate investing while minimizing the level of effort and risk involved.
We’ll cover all the details of passive investing in real estate, including the different types of passive real estate investments, the benefits and drawbacks, and how to build a successful passive real estate portfolio.
What is passive investing in real estate?
Passive investing in real estate means investing in a real estate index or portfolio without actively managing the properties. The objective is to earn a return on your investment without having to put in the effort or time needed to manage the property.
Passive investing has become increasingly popular in recent years as investors seek low-cost, low-risk investment opportunities that offer a steady income.
Characteristics of passive investing
The characteristics of passive investing include:
- Indirect (3rd party) ownership: Passive real estate investing means that you don’t actually own the property you’re investing in. Investing in real estate for passive income involves purchasing shares in a real estate fund, or through a crowdfunding platform.
- Recurring income: Most real estate funds take the income generated by the properties in their portfolio and pass it on to investors in the form of dividends—providing a steady, reliable income stream.
- Lower risk: Since you’re buying a share of a diversified real estate portfolio, there’s less risk compared to putting all of your money into a single property or investment asset.
- Lower upfront costs: Passive investing requires lower costs up front, since you aren’t buying the property or managing it yourself.
Types of passive investments
There are several types of real estate passive investment options, including crowdfunding, and real estate funds.
- Crowdfunding projects allow investors to pool their money together to invest in real estate projects.
- Real estate funds are professionally managed investment vehicles that gather money from multiple investors and invest in real estate properties.
We’ll go into more detail on each of these investment types in a few.
Reasons to consider passive investing
Investing in real estate for passive income can be an attractive option for several reasons.
Passive investment options like real estate funds, and crowdfunding platforms all provide investors with opportunities to invest in a variety of property types without the cost or stress of actively managing them.
Further, as noted above, passive real estate investments have a proven track record of generating steady income streams, making them an ideal option for investors that want a reliable source of passive income.
Plus, investing in real estate funds can help diversify your portfolio, thereby reducing your level of risk exposure.
Other factors to consider with passive investing
Despite the above benefits, it’s important to be aware of the potential risks of passive real estate investments. Before putting your money in any type of investment asset, it’s always a good idea to talk it over with a financial advisor like our experts here at Lloyd Jones.
When choosing a passive investment, there are several factors to consider.
- Track record: Investors should look at the track record of the real estate fund and consider the knowledge and experience of the fund manager.
- Fees: Fees should be carefully evaluated to ensure that they don’t eat into returns.
- Diversification: Diversification is also important to make sure that the portfolio isn’t overly reliant on any one property or geographic location.
- Asset quality: Investors should consider the underlying assets of the investment, such as the quality of the properties and the expected income streams.
What are the types of passive investing in real estate?
Passive investing in real estate has become increasingly popular in recent years. It’s an investment strategy that involves investing in real estate assets without actively managing them. Instead, real estate investors rely on professional management teams to make investment decisions and manage the properties.
There are several types of real estate passive investing.
Let’s discuss each of these categories in detail and provide insight into their advantages and disadvantages.
Real estate crowdfunding
Real estate crowdfunding allows several investors to join forces to invest in real estate projects. Crowdfunding platforms like Fundrise, RealtyMogul, and CrowdStreet allow individuals to place funds in a wide range of real estate projects, including apartment buildings, office buildings, and retail spaces.
Advantages of real estate crowdfunding
Real estate crowdfunding has several advantages for passive investors.
- Offers access to a wide range of real estate projects that may not be available through traditional real estate investing channels.
- Requires lower investment minimums than traditional real estate investing, which makes it easier for investors to get started with real estate investing.
- Provides opportunity to invest in specific projects that fit their target return, holding period, and risk tolerance.
Disadvantages of real estate crowdfunding
However, real estate crowdfunding also has some drawbacks.
- Real estate crowdfunding is less liquid than other passive investing options. Once an investor has committed funds to a project, they typically have to wait until the project is completed and sold to receive their return on investment.
- Real estate crowdfunding investments may be subject to more regulatory requirements and oversight than traditional real estate investments.
Real Estate Funds
Real estate funds are professionally managed investment vehicles in a variety of real estate assets. These funds can be either publicly traded or privately held, and they may invest in a range of real estate assets, including commercial, industrial, or residential properties.
Advantages of real estate funds
Real estate funds have several advantages for passive investors.
- Real estate funds provide access to a diversified portfolio of real estate assets, which reduces risk and increases diversification.
- Real estate funds are professionally managed, which can provide investors with access to experienced investment managers who have the expertise to make informed investment decisions.
- Real estate funds can provide investors with a reliable income stream through regular dividend payouts.
Disadvantages of real estate funds
However, real estate funds have several disadvantages as a passive investment option.
- First, they may have high fees, including management fees and performance fees, which can eat into investors’ returns. Additionally, real estate funds may have lockup periods meaning that investors might not be able to sell their shares quickly.
- Like all investments, real estate funds are subject to market volatility and economic downturns, which can lead to declining property values and lower than expected dividend payouts.
- Due to the nature of passive investing, investors in real estate funds have limited control over the underlying assets. Decisions about the management and operation of the properties are made by the fund manager, which may not align with investors’ preferences or investment goals.
What is the difference between active investing and passive investing in real estate?
Active investing involves direct participation in the real estate market, while passive investing involves indirect participation.
Passive investing offers several advantages over actively managed real estate investments.
First, passive investing typically provides steady income in the form of dividends or rental income, providing a stable source of cash flow for investors.
Additionally, passive investing offers reduced risk since the portfolio is usually diversified across multiple property types and geographic locations, reducing the impact of any single property’s performance.
Furthermore, passive investing generally involves lower costs since the investor isn’t responsible for paying expenses associated with property management or maintenance.
While passive investors rely on third-party intermediaries like real estate funds, active investors buy and manage properties directly.
Active investors have control over the property and generate income from rental payments and appreciate property values. But active investments require more time, effort, and upfront capital in exchange for those benefits.
The choice between active and passive investing depends on individual goals, risk tolerance, and available resources.
What are the advantages and disadvantages of passive real estate investing?
Here’s a breakdown of the pros and cons of real estate investing.
Advantages of passive real estate investing
- Reduced initial investment required: Passive real estate investing often requires a lower initial investment than traditional real estate investing, making it more accessible to a wider range of investors.
- Potential for consistent income streams: Passive real estate investments such as real estate funds offer potential for consistent income streams through regular dividend payouts, providing investors with a reliable source of passive income.
- Greater liquidity: Passive real estate investments offer greater liquidity than traditional real estate investing, enabling investors to sell their assets more easily and quickly.
- No prior knowledge or expertise needed: Passive real estate investing doesn’t require extensive knowledge or expertise in real estate, making it an accessible option for those who are new to investing.
- Reduced need for direct involvement: Passive real estate investing requires less direct involvement than traditional real estate investing, since the management and operation of the property are handled by the owners of the fund.
- Lower risk: Passive real estate investments may offer a degree of protection against significant losses, as investors typically invest in a diversified portfolio of assets, reducing the impact of any single asset’s poor performance.
Disadvantages of passive real estate investing
- Lower potential returns on investment: Passive real estate investments may offer lower potential returns compared to traditional real estate investing, as investors don’t have direct control over the underlying assets.
- Limited control over project decisions: Passive real estate investors have limited control over project decisions, as these are typically made by professional managers, leading to misalignment with investors’ preferences and investment goals.
- Susceptibility to market changes: Like all investments, passive real estate investments are subject to market volatility and economic downturns, which can lead to fluctuations in share prices and dividend payouts.
How do I get started with passive real estate investing?
There are many reasons to add commercial real estate to your portfolio. Here’s your checklist of the criteria for starting in real estate investing.
Determine your investment objective, whether it’s generating passive income, long-term appreciation, or a combination of both.
Establish your investment horizon, that is, whether you’re looking to invest short-term or long-term.
Expected cash flow
Consider the expected cash flow from your investment, including rental income, operating expenses, and potential appreciation.
Evaluate the level of leverage you’re comfortable with and the associated risks.
Overall market risk
Analyze the overall real estate market, including trends in supply and demand, interest rates, and economic conditions.
Your overall financial situation
Assess your overall financial situation, including your existing assets, liabilities, and cash flow, to ensure you’re not taking on excessive risk or sacrificing other financial goals.
Consider investing in a diversified portfolio of passive real estate investments to reduce the impact of any single asset’s poor performance.
Lack of capital or time shouldn’t deter you from investing in real estate.
Passive real estate investments like crowdfunding, and real estate funds offer a way to invest in real estate opportunities without the hassle of property ownership.
Again, it’s important to consider your investment goals and portfolio and potential limitations with passive investing. While it may not provide as much control or profit potential as active real estate investing, passive real estate can be a great way to diversify your investment portfolio.