Do you want to earn extra income from real estate without having to deal with the hassles of managing properties, tenants, or mortgages? If so, you might want to consider becoming a passive real estate investor.
Passive real estate investing is a way of investing in real estate without having to be actively involved in the day-to-day operations of the properties.
This blog post will explain passive real estate investing, how it works, and some of the best ways to become a passive real estate investor.
What Is Passive Real Estate Investing?
Passive real estate investing is a strategy in which an investor contributes capital to a real estate investment, and another professional manages it. This allows investors to earn extra income without doing physical labor, acting as a landlord, or even buying property in some cases.
There are different types of passive real estate investments, such as:
Real estate investment trusts (REITs)
These are companies that own and operate income-producing properties, such as apartments, offices, malls, hotels, etc. Investors can buy shares of REITs on the stock market and receive dividends from the rental income and capital appreciation of the properties.
These are online platforms that connect investors with real estate developers and operators who need funding for their projects. Investors can choose from various deals and invest as little as $500 in exchange for a share of the profits and equity of the project.
These are partnerships between investors and sponsors who pool their money and expertise to buy and manage large-scale properties, such as multifamily complexes, self-storage facilities, senior housing, etc. Investors receive periodic distributions and a portion of the sale proceeds when the property is sold.
What Are the Benefits of Passive Real Estate Investing?
Passive real estate investing offers many benefits for investors who want to grow their wealth without sacrificing their time or lifestyle. Some of these benefits are:
You don’t need extensive knowledge
Passive real estate investors need to research any fund, REIT, or rental property before diving in. However, they don’t need to have deep expertise in the real estate market, deal analysis, property management, legal issues, etc. They can rely on the professionals who handle these aspects for them.
Diversification is a method of spreading money across different assets to reduce the risk of losing principal. Real estate is a great way to diversify your portfolio because it has a low correlation with other asset classes, such as stocks and bonds. This means that when one asset class goes down, real estate may not be affected or may even go up.
Potentially short-time commitment
Unlike active real estate investing, which requires constant involvement and attention, passive real estate investing requires minimal effort once you find and select a deal. You can sit back and enjoy the passive income while someone else takes care of the property’s day-to-day operations.
Potentially low entry costs
Depending on the type of passive real estate investment you choose, you may not need a lot of money to get started. For example, you can invest in REITs or crowdfunding platforms with as little as $500 or $1,000. This makes passive real estate investing more accessible and affordable for many people.
Passive real estate investing can offer tax benefits that boost your returns. For example, you can deduct expenses such as mortgage interest, depreciation, maintenance costs, etc., from your taxable income. You can also defer or avoid capital gains taxes by using strategies such as 1031 exchanges or opportunity zones.
How to get started with passive real estate investing?
If you are interested in passive real estate investing, here are some steps you can take to get started:
Define your goals and criteria
Before you invest in any deal, you need to have a clear idea of what you want to achieve and what you are comfortable with. For example, how much money do you want to invest? What kind of returns do you expect? How long do you want to hold the investment? What level of risk are you willing to take?
Do your due diligence
Once you set your goals and criteria, you need to do your homework and research the different types of passive real estate investments available. You also need to vet the sponsors or platforms that offer these deals and check their track record, reputation, fees, communication style, etc.
Choose a deal and invest
After you find a deal that matches your goals and criteria, you need to review the offering documents, such as the private placement memorandum, the operating agreement, the subscription agreement, etc. You also need to sign the necessary paperwork and wire the funds to the sponsor or platform.
Monitor your investment
After you invest, you need to keep track of your investment performance and progress. You should receive regular updates and reports from the sponsor or platform, such as financial statements, occupancy rates, renovation updates, distribution notices, etc. You should also ask questions and provide feedback if needed.
Passive real estate investing is a great way to earn extra income without doing physical labor, acting as a landlord, or even buying property in some cases. It can also help you diversify your portfolio, reduce risk, save time, lower costs, and enjoy tax benefits.
However, passive real estate investing is not a get-rich-quick scheme or a guarantee of success. You still need to do your research, choose wisely, and monitor your investment. You also need to be aware of the potential drawbacks, such as lack of control, liquidity issues, market fluctuations, etc.