If you think real estate investing is only about buying real estate, fixing its issues, and selling or renting them to generate profit, you’re only half right. Such an idea of investing is for active investors who can afford to dedicate 750+ hours per year. If you have the time, you can earn a fat salary between $70,000 and $124,000.
Related: International real estate investor: The benefits of the “Golden Visa”
But what about the rest who don’t have time to spare but want to generate passive income from real estate? This is where passive real estate investing shines.
What is passive real estate investing?
The passive real estate investment route doesn’t require you to actively participate in buying, managing, and selling real estate. You need to choose a type of passive investment vehicle (REIT, Crowdfunding, or Syndications – more on this later), research, select a deal and count your income dollars.
But is it worth it? Yes, passive real estate investing can help you increase your wealth. Or, if you have debts to pay, the vehicles can help you pay off your dues. For example, if you have decided to consolidate a payday loan or credit card, you can easily use the monthly dividends to cover your obligations.
But all of this is only possible if you are willing to do the work, stay patient, learn what’s necessary, and are passionate about investing. If you have what it takes, read ahead. This article will help you choose the best passive real estate investment vehicle and explain how you can start investing.
But first, here are some essential terms that you should know.
Passive real estate investing: Important terms
- Liquidity – Liquidity refers to the ease with which an asset, or security, can be converted into ready cash without affecting its market price.
- Diversification – Diversification reduces overall risk by spreading your money in different investments.
- Accredited investors – An individual or a business entity that satisfies at least one requirement regarding their income, net worth, asset size, or professional experience to trade securities that may not be registered with financial authorities.
- Portfolio – A portfolio is a collection of financial investments.
A quick guide to passive real estate investing
There are three popular types of passive real estate investments:
Real Estate Investment Trusts – REITs
- Expected Return – 7% to 10%
- REITs are businesses that own, run, or finance income-producing real estate.
- REITs are like mutual funds in that they pool the money of many investors. Investing in REITs can earn you dividends without buying, managing, or financing any properties yourselves.
Pros
- Liquidity – You can buy and sell REITs like stocks throughout the trading session
- Diversification
- Transparency
- Stable cash flow through dividends
Image: Mark Keast
Cons
- REITs not listed on major exchanges have limited liquidity
- Dividends are taxable
- Subject to market risk
- High management and transaction fees
How to invest in REITs
You can purchase shares of a REIT if listed on a major stock exchange like you would buy shares of other public companies. Another option is to invest in REIT mutual funds or exchange-traded funds (ETFs). If you want more liquidity, this is the right way to go.
Private REITs are a little more challenging. They are typically restricted to accredited investors with direct access to the funds or can reach them through private networks. Private REITs also have much higher investment thresholds and can be more challenging to sell.
Real estate crowdfunding
Expected Return – 10.5% to 25.65%
With real estate crowdfunding, you can use online financial technology or crowdfunding sites to put your money into any pool of real estate investment funds you want.
Most crowdfunded real estate investments are held privately. This means you can access private market property investments unavailable to the general public.
Pros
- It does not demand much capital
- Access to unique real estate projects and opportunities, like in Tennessee, visit eXp Realty here >> for investments there
- No need for investment fees
- Diversification
Photo by Ярослав Алексеенко/Unsplash
Cons
- Some platforms require you to be accredited investors (relatively well-capitalized) to participate
- Assets can’t be easily sold off
- Dividends are taxable
- High risk
How to invest in real estate crowdfunding
Crowdfunding is an accessible vehicle to generate passive income, but there are risks.
One of the primary reasons it’s risky is that crowdfunding platforms aren’t officially regulated. Thus, any company without the right skills to manage the raised money can come forward with its project.
So, to ensure your money goes to the deserving hands and you get your expected returns, you must do thorough research on the team behind the project you’re willing to fund.
Here are some other things to keep in mind –
- Compare sites, services, fee structures, terms, investment opportunities, and asset classes.
- Research the advantages and drawbacks associated with any real estate crowdfunding solutions.
- Find out how much you can comfortably invest without going overboard.
- Figure out what kind of return on your investment you want to get.
- Find out how long your money might be locked up and if you can afford to go without it.
- Think about what kind of real estate and the property you’d like to invest in most.
- Prepare any paperwork you need to prove you are an accredited investor.
- Read user feedback and comments to determine what investors say about a crowdfunding site or service.
- Talk to your tax person to determine how investments affect your taxes.
Syndication
Expected Returns – 7% to 8% annual returns and 40% to 60% profits upon asset sale in year five. Syndication combines your money with other investors to become a limited partner and invest in properties that a sponsor buys and manages.
If you become a part of a real estate syndication, your role would be to give a portion of the capital needed to buy the property. In exchange for your money, you’ll get a share of ownership of the property.
By owning a piece of a real estate property, you’ll get passive income from it every month (or every three months) and a return on your investment when the property gets sold.
Pros
- Get passive income without needing to manage tenants or leaking toilets.
- Tax benefits.
- Several asset classes to choose from.
- You can invest in any real estate outside your state boundary.
Cons
- A long capital holding period can stretch for 3, 5, 7, or maybe 10 years
- Assets can’t be easily sold off or divested of quickly
- Lack of control over the deal
- You must be an accredited investor to be eligible to invest
How to invest in real estate syndication
When investing in syndications, choosing who to work with is the most challenging and riskiest choice you have to make. Try to get to know other investors, preferably those who are interested in the same type of assets as you are.
You can meet other investors by joining Facebook groups, going to real estate conferences, or attending events organized on Meetup is another great way to connect. Always make sure to thoroughly vet a syndication company before going forward. If you want to minimize risk and make your investment worthwhile, choosing experienced and trustworthy real estate syndicators is essential before investing.
Bottom line
Passive real estate investments are a great avenue to boost your overall financial portfolio or cover your credit card, high-interest personal loan, or consolidated payday loan obligations.
But, like any other investment, it has its risks. So, it’s best to approach them with a healthy dose of knowledge, research, and caution.
Top photo by Precondo CA/Unsplash
Lyle Solomon has extensive legal experience, in-depth knowledge, and experience in consumer finance and writing. He has been a member of the California State Bar since 2003. He graduated from the University of the Pacific’s McGeorge School of Law in Sacramento, California, in 1998 and currently works for the Oak View Law Group in California as a Principal Attorney.
