What Is Passive Real Estate Investing & How Does It Work?

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Most people make a living based on the physical work they do, earning a paycheck every few weeks in exchange for that work. This is called active income because you must actively continue to work in order to maintain that income stream.

If you stop working, whether it’s due to an illness, a layoff, or just because you are reaching the age of retirement, that income stream ends.

Meanwhile, sophisticated investors have learned that the key to financial stability is through passive income. Passive income is the ability to earn a steady income stream and grow your wealth even when you are not working. 

For example, rather than investing in rental properties and becoming a landlord, you can invest in a real estate syndication or purchase a property and let a property management company take care of day-to-day operations. 

In this article, we’ll discuss basic real estate terms like passive real estate investing, explain some of the most common types of passive real estate investments, and give some insight into how you can get started.

What Is Passive Real Estate Investing?
Passive real estate investing means investing in opportunities in the real estate sector that do not require a lot of effort to maintain. Some examples of passive real estate investments include REITs, crowdfunding, and real estate funds.

What Is Passive Real Estate Investing?

Passive real estate investing means investing in real estate in a hands-off manner. The idea is that investors have an opportunity to use their money to invest in real estate without having to do much, if any, management.

REITs, crowdfunding, and real estate funds are just some examples of passive real estate investing.

Passive vs. Active Real Estate Income

The opposite of passive real estate income is active real estate income. So, what’s the difference between making an active or a passive income through real estate? The key difference is the fact investors are typically directly involved in each step of the investing process.

Let’s say you want to invest in a rental property. If you want to earn passive income with real estate investing, you can purchase a rental property and hire a property management company to maintain it for you. You don’t have to worry about collecting rent from tenants, screening rental applicants, or cleaning and fixing up rental properties in between tenants because your property management company handles all of that.

With active real estate investing, there is no property management company. Investors may handle the investing process from start to finish, which includes researching and bidding on properties, finding suitable tenants, and managing the property.

There’s no clear-cut answer when it comes to active vs. passive real estate investing. Each type of investment has its benefits, so it’s up to you to decide whether passive or active real estate investing is right for you.

How to Passively Invest in Real Estate

Most individuals acquire passive income through investing.

The most widely known and prevalent form of investing is owning stock in publicly traded companies through the stock market—but there are other ways to earn money without actively working. 

Here are some passive real estate investments you can consider if you want to try to do just that:

  1. REITs

Real estate investment trusts (REITs) are companies that pool together money from several individual investors and use that money to invest in income-producing real estate, such as:

  • Rental properties
  • Warehouses
  • Retail centers
  • Offices
  • Hotels

REITs are a popular form of real estate investing because they require little effort from individual investors. They also can help diversify your portfolio as a lower risk investment.

Investors simply purchase shares of a REIT, similar to how you would buy stock. REIT shares are traded and sold on an exchange. Investing in a REIT also entitles shareholders to dividends that are paid out regularly. The money which is used to pay these dividends comes from payments that renters make, so REITs typically have a fairly steady stream of income.

  1. Real Estate Crowdfunding

Crowdfunding has become a more popular method of real estate investing in recent years. While investing in stocks is something anyone can do, real estate investing often requires a lot more capital to get started. 

With real estate crowdfunding websites, individual investors can invest in real estate that they typically wouldn’t be able to invest in. All investors have to do is pool their money in a crowdfunding platform and they can start investing. However, there are risks that come with real estate crowdfunding, such as instances of fraud. 

  1. Real Estate Funds

A real estate fund is a type of mutual fund that’s used to invest in securities that public real estate companies may offer. For example, a real estate fund may be used to invest in a REIT. 

One key difference between investing in real estate funds and REITs is the fact that REITs pay dividends, while real estate funds appreciate and provide value that way. Real estate funds are an investment opportunity that could potentially be more accessible to people who lack the funds for traditional real estate investing or are looking for a simpler way to get involved.

  1. Property Investments with Third-Party Management

You also have the option of investing in rental properties and using third-party property management companies to take care of them. This is a more hands-on approach, but it means you don’t have to act as a landlord for your rental property. 

With a property management company, you don’t have to worry about making repairs, finding renters, or collecting rent payments. That being said, it typically costs more to hire a property management company than to act as a landlord.

Why Consider Passive Real Estate Investing?

Real estate as an investment has been considered a top performing asset class for decades because it has the potential to provide both consistent income from rents as well as long-term appreciation. Real estate is also scarce, as there is only so much land.

Food and shelter (i.e., real estate) are the two most fundamental material human needs. They have intrinsic value, which means they can act as a hedge against inflation. Moreover, as cities grow, demand for real estate increases, since more people need more places to live, work, eat, and shop. This is why real estate has historically appreciated in value over time and produced wealth for those who own it. Ironically, passive income is usually taxed at a lower percentage rate than active income, especially sheltered income from real estate.

Today, because of technology and new federal regulations, the potential for a truly cost effective and simple way to invest in real estate has been realized. Any investor, regardless of their income or net worth, can now invest directly in private real estate online with relatively low fees and low minimums.

Technology can do for real estate investment what it did for media, travel, and ecommerce: lower costs, increase transparency, and potentially drive better performance. Online direct real estate investment has the potential to not only revolutionize real estate capital markets, but also broader financial markets, by democratizing access to a more sophisticated investment portfolio with higher return potential and by providing an actual alternative to the stock market.

Passive Real Estate Investing Risks to Keep in Mind 

While passive real estate investing could potentially be a great opportunity for you, it’s important to understand the risks as well as the rewards. The reason why investors care about real estate is that it has the potential to earn them money. However, like any other opportunity, these investments come with risks.

First, there’s the unpredictability of the real estate market. While it may look like a great time to buy, you can’t know for sure whether property values are going to rise or fall. Because real estate investments can potentially be very expensive, you may stand to lose a lot of money.

With passive real estate investing, you’re also putting your fate in the hands of others. When somebody else is doing the hands-on work, you can’t be sure that your investment is being handled exactly as you would like.

If you’re short on cash, real estate can be a problem because it isn’t liquid. You can’t easily turn your real estate into cash for emergency funds; when you invest in real estate, your investment could be tied up for a while.

How Do You Know If Passive Real Estate Investing Is Right for You?

When deciding if passive real estate investing is right for you, it’s important to consider your financial situation, your risk tolerance, and the benefits of passive real estate investing. Everyone has a unique situation, so it’s important to consider how much you can invest, how much risk you’re willing to take on, and how hands-on you want to be with your investment.

Get Started & Track Your Passive Real Estate Investments

Passive real estate investing can be an effective way to invest in real estate without getting hands-on or building the capital to invest in rental properties and commercial real estate. If you want to start investing and track your passive real estate investments, Mint can help. The Mint app allows you to effortlessly track all your investments in one place, so you can keep an eye on your whole portfolio to make sure you’re meeting your goals. If you’re looking for an easier way to invest, try the Mint app today.

This is for informational purposes only and should not be construed as legal, investment, credit repair, debt management, or tax advice. You should seek the assistance of a professional for tax and investment advice.

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