What is a passive real estate investment?

Passive real estate investing is when people earn money on a property (or properties) with reduced obligations. Often, if you invest in real estate, you’re responsible for the property. If you rent it out, for instance, it’s also your job to take care of the tenants and maintenance of the building. With a passive real estate investment, however, you might forgo some of these responsibilities.

While this may seem too good to be true, passive real estate investment opportunities are out there. Of course, there are varying degrees of effort involved in the investment, the amount of income you generate and ultimately the success of the investment. Let’s take a bigger look at how passive real estate investments work and why they might be worth knowing about.

Why are “passive” real estate investments popular?

Passive real estate investments are popular because, in a perfect world, they’re low effort and high reward. But before we get ahead of ourselves, the word “passive” doesn’t always translate directly. You may find passive real estate investments less involved than others, but it might be misleading to think there are no strings attached. The performance of the investment, and ultimately how passive it is, may be affected by how involved you are, how much capital you’ve expended and the housing market.

Many households benefit from having an additional income stream, and it’s especially helpful if you’re able to avoid expending time and energy you may want to spend elsewhere. Once the setup and management of an investment is locked and loaded, you can essentially sit back, relax and enjoy the ride.

Not only do passive real estate investments provide a sense of flexibility and freedom, but also the opportunity to diversify income streams to achieve more financial stability. The combination of autonomy from both an effort and financial perspective are enticing features of a passive real estate investment.

How to invest in real estate for passive income

There are many ways you might invest in real estate for passive income, for example:

Real estate investment trusts (REITs)

Real estate investment trusts (REITs) are companies that own and operate investment properties, offering people the ability to become shareholders in this property portfolio. To qualify as a REIT, companies must pay 90% of their taxable income to shareholders. REITs are an example of passive real estate investing because the holding company operates the property and pays its shareholders dividends.

Crowdfunding

Crowdfunding is another example of how to invest in real estate for passive income. Crowdfunding works by raising a large amount of money from a big group of people and using that money to finance a project (in this case, real estate). The investors then either get dividends based on the number of shares they own, or interest payments on the amount they invested.

Exchange traded funds

Exchange traded funds (ETFs) are traded on the stock market. If you invest in a real estate ETF, the ETF is likely investing the capital in multiple REITs or real estate companies. Exchange traded funds can help diversify your passive real estate investment because they’re putting the capital across multiple entities.

Real estate mutual funds

Real estate mutual funds are organized and managed by professionals who collect capital from multiple investors and use that capital to invest in a portfolio of properties. They may strategically invest their client’s capital into real estate investment vehicles.

Private real estate funds

Private real estate funds are created by “sponsors” who establish large funds used to invest in real estate. The sponsor offers equity partnerships to private investors. Private real estate funds typically come with a minimum investment from high-net-worth investors.

Remote ownership

Remote ownership is a way for people to invest in properties located in different geographical locations by using online platforms or property management companies to help operate the investment. The need for physical proximity is therefore minimized, and the owner may delegate management tasks while profiting from rental income or property appreciation. Do note that remote ownership may not necessarily be low effort, and you may reduce your passive income returns by having to pay for a management company.

Pros and cons of passive real estate investing

Understanding the pros and cons of passive real estate investing can help you make an informed decision for your individual investment needs.

Pros of passive real estate investing

• Potential for passive income: Passive real estate investments are meant to be relatively low effort. In many of the above examples, all it takes is an investment and patience as dividends roll in, as opposed to investing in and managing a property yourself.
• Diversifying your portfolio: There are many different ways to make investments. Historically, real estate has been one of the most dependable ways to consider diversifying your portfolio. By making a passive real estate investment, you’re adding an additional investment type to your roster.
• An introduction to real estate investing: Passive real estate investments, whether you’re considering an REIT, crowdfunding platform or mutual fund, may be a good way to get your feet wet in the world of real estate investing. Oftentimes, someone else is calling the shots and you’re simply contributing capital. This may be a way to learn more about the market and how people invest.

Cons of passive real estate investing

• Limited control over your investment: Although the allure of a passive real estate investment is reduced responsibility, this also means you might have less control over your investment. If someone else is managing — or even controlling — what you invest in, you’re relinquishing a certain amount of control over that investment.
• Vulnerable to market conditions: Like most investments, the real estate market coincides with the health of the economy. As the market changes, for better or for worse, so does the value of your investment.
• Potentially low return: Depending on the type of investment you make, there may be various fees and expenses that take away from the income you’re generating. You may also notice that your investment isn’t yielding as high of a return as you’d like, possibly due to the size of your investment or due to the percentage of dividends you receive from the company or person managing your investment.

In summary

Passive real estate investing can give investors the opportunity to generate income while diversifying their portfolios with potentially low effort, compared to owning and managing a property on their own. From REITs to remote ownership, there are many intriguing ways to profit from the passive real estate game.