- August 17, 2020
Can You Invest Passively in Real Estate?
When it comes to investments, few people think about passive investments because you generally want to have control over where your investment is going. For instance, first-time property investors need to take lots of different factors into consideration including location, furnishing, local market conditions and hiring property managers.
As you can imagine, this takes an incredible amount of work and can be daunting even if you’re seasoned in other investments.
When people mention passive investments in real estate, they’re often referring to the passive income you get from rental properties. However, owning a property can be incredibly expensive unless it’s been handed down to you from a relative. When you inherit property, one of the most common ways to use it is to rent it out for a bit of extra passive income. But what about other passive investments? Can someone invest passively in real estate through other methods? Do you need to own property or let it in order to make a passive income?
What Exactly Is a Passive Real Estate Investment?
In contrast to regular passive income from something like property rental, passive real estate investments can also mean investments that are carried out by an investment firm or manager. All they need is your initial investment and they’ll essentially flip that money into something more. As with all investments, you’re taking a risk and it’s not guaranteed profit. In addition, the amount you make is going to be relatively small unless you invest a lot of money.
In other words, passive real estate investment means you have no real direct responsibilities for managing the property. You serve as an investor that funds a project and you expect to get a return from it. As you can imagine, you’ll need a bit of money to start this up, but if you work together with seasoned investors, then you can earn a passive income with relative ease and slowly build your investment portfolio to unlock future opportunities.
What Kind of Passive Real Estate Investments Are There?
There are two common options for passive real estate investments: Real Estate Investment Trusts (REITs) and real estate crowdfunding. When people refer to a passive real estate investment, they’ll often be talking about one of these two options. Though others exist, we’d highly suggest that you check these two options first.
A REIT is an investment vehicle that owns income-generating properties. Alternatively, they can also offer financial help to people that own real estate. A public REIT allows anyone to purchase stock, mutual funds or exchange-traded funds. This eventually leads to earning dividends without needing to work or manage properties yourself. Since it’s publicly traded, the investments are liquid and you can choose to sell them later. Private REITs are not publicly traded, meaning there are fewer fluctuations in the market but they offer no liquidity since the shares can’t easily be sold.
In contrast, real estate crowdfunding is a relatively new way to passively invest in real estate. Real estate crowdfunding is all about pooling together investment capital from multiple investors to buy a particular property or portfolio. Crowdfunding gives investors a bit more control since it allows you to pick what properties you invest in. You’re also given the option to invest in different kinds of real estate such as multifamily assets or industrial properties. As a relatively new form of passive real estate investment, it’s rapidly growing and it’s predicted that the industry will be worth over $300 billion by 2025.
Should I Consider Passive Real Estate Investing?
There are a couple of good reasons why you might want to consider passively investing in real estate as opposed to managing your own properties, even if you have the financial means to do so.
- You personally don’t need to deal with tenants and other responsibilities. One of the biggest hurdles to renting out property is having to deal with the responsibility of managing a property. This means no dealing with tenants, no cleaning up properties and no need to respond to repair requests.
- You don’t need to work with banks either. Since you’re only investing in a REIT or crowdfunded properties, you personally don’t need to work with banks to get a loan to pay for a property.
- You leverage the expertise and experience of others. You won’t personally be making decisions. Instead, real estate experts will be making most of the decisions, meaning you’re less likely to fail or make a bad decision.
We hope that this article has helped you decide whether or not passively investing in real estate is worth it for you.