One of the more powerful ways to make your money work for you is to engage in passive real estate investing. However, many people don’t know what passive real estate investing is or how it works. Before diving into passive real estate investing, it’s essential to understand what it is, how it works, any advantages and disadvantages, and whether it’s the right investment for you.
What Passive Real Estate Investing Is Not
Many believe that if you buy residential real estate to rent out, it would be passive real estate investing. The rationale behind this is you buy the property, find renters, and collect checks. However, there’s more of an active role that you, as the property owner, must undertake.
For instance, you need to select and purchase the property. In addition, you need to screen renters, handle necessary repairs and updates, and sometimes take measures to collect the rent, either by themselves or by working with a property management company. This isn’t genuinely passive as there are always active steps to take.
What Passive Real Estate Investing Is
Passive income investments refer to money coming in that is partially or fully automatic. You invest upfront and then receive cash as dividends and capital gains in the form of value increases, such as stocks and bonds. Investing and gaining in this fashion is passive because you don’t have to manage the investment.
So, how can a real estate investment be passive? Much like purchasing any equity security, you can invest capital into a real estate venture completely managed by someone else. One example would be buying stocks in publicly traded real estate businesses such as large real estate brokers, real estate development companies, or construction firms. Another option would be to invest in a Real Estate Investment Trust or REIT. REITs pool capital resources from several investors and then invest in large-scale real estate developments and sales.
There are three basic types of REITs. The first and most common is an equity REIT, which purchases and manages revenue-generating real estate properties such as rentals. Next is the mortgage REIT which, as the name implies, either loans money out directly for real estate purchases or buys existing mortgages from another lender. Mortgage REITs provide income in the form of dividends generated by the mortgage interest. The last primary type of REIT is called a hybrid REIT, which combines equity and mortgage REITs.
REITs are then further classified by how the shares are bought and sold. First up are the publicly traded REITs regulated by the Securities and Exchange Commission (SEC) and listed on a national security exchange. The second type is non-publicly-traded REITs, which are also regulated by the SEC but don’t trade on a national security exchange. Since they aren’t publicly traded, they usually avoid market fluctuations resulting in a more stable investment. Finally, private REITs are neither publicly traded nor listed with the SEC, but they raise funds from a group of private investors.
Another type of passive real estate investment is a real estate fund, a mutual fund whose primary focus is real estate ventures. Many of these real estate funds invest in REITs as well. A real estate fund could be a more attractive investment as it provides a greater degree of diversification, reduces risk, and increases the possibility of positive returns.
Similarly, you can contribute to a real estate crowdfunding campaign, in which you directly invest in a single real estate deal yet incur none of the day-to-day management. Returns from crowdfunding can come in the form of monthly payments or partial equity of the property involved, allowing you to gain income much like dividends and profits from a future sale.
Passive Real Estate Investment Pros
There are several advantages to investing in passive real estate, such as:
- Government works for you. When you purchase any equity investment, including the real estate passive income investments mentioned above, you are granted tax-deferred returns that allow you to keep more of your money. Whereas interest payments and stock dividends are typically taxed at the highest income bracket. The depreciation expense can offset your taxable income.
- No hands-on management. You won’t have to fix a broken toilet, deal with unruly or non-paying tenants, or deal with any tenant-related issues at all. For most investors, this is a huge plus.
- No need to work with a bank. Getting financing, genuine estate investments, and any other non-primary residential property can be challenging. The litany of documentation and requirements needed to get approved for an investment loan requires much time and can be rather tedious.
- Utilizes the expertise of others. You don’t need to know anything about real estate to invest in it passively. You’re trusting your investment to someone who has the experience and knows how the real estate industry works.
- Make money while you sleep. Investing passively in a real estate venture can be very quick. Do your research to make sure you’re involved with a reputable investment, sign paperwork, and transfer funds online. Once the paperwork and transfer are processed, you own an equity stake in that venture and can begin to generate passive income right away, even while you sleep at night.
Cons of Passive Real Estate Investing
Any investment in which you engage comes with risk, and passive real estate investments are no different. With a REIT, much like a stock, you can lose your principal investment if the value of the asset drops. A REIT can drop if the real estate portfolio managed by the REIT isn’t performing up to expectations or simply from a downturn in the market. Whether you invest passively or actively, it’s necessary to do comprehensive research to ensure that your chance of loss is mitigated. Doing so will turn up the best possible options for you to invest in and avoid those with too many red flags. While the income is passive, there’s still work to be done on the front end. You can’t just throw your money to someone else without fully understanding their history and the details of their ventures.
If you’d like more information on investment opportunities, contact the knowledgeable team at Titan Funding. You can reach us online or by phone at 855-910-6434. Any of our team members would be happy to discuss investment options with you to make the most of your money.