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Everyone is all about earning passive income these days and trying to secure a lifestyle where you only have to put in a few hours of work to earn a sustainable income.
And why not? Isn’t being able to live more of your life for the joy of living it a dream come true?
The biggest problem is that a lot of these so-called passive income opportunities only really work for a few lucky or talented people. Everyone else either never sees the kind of income they were hoping for, or discover that their ‘passive’ income opportunity is actually a lot of work.
Real estate investing is one of the few exceptions to the rule.
After all, real estate is in high and consistent demand. Everyone needs a place to live, a place to work, a place to sell their products and services. And that means that everyone needs some kind of real estate and real estate investors who help make those dreams happen.
Passive real estate investing is a way of getting your share of the real estate pie, without needing to put in a ton of extra work or being directly involved in the properties and property management yourself.
Let’s take a look at what passive real estate investing is, who it works for, and the reasons you might want to consider passive real estate investing over other kinds of investment strategies.
What Is Passive Real Estate Investing?
Passive real estate investing is pretty simple on the face of things. You invest in real estate properties through a management company, trust, or crowdfunding option, and reap the benefits with little or no direct participation in the management or sale of the property itself.
You can even become a full-time passive real estate investor if you know how to choose the right investments and how to build your income from one investment into the seed money you need for another.
Of course, full time in this case refers more to the amount of income your investments produce, not the amount of time you need to invest into them. Transitioning to being a full-time passive investor sometimes takes a little more work, but once you’re established and have multiple income streams from different investments you can potentially generate a full-time income with just a few hours of work a week.
What Are The Main Differences Between Passive Real Estate Investing And Active Real Estate Investing?
There are a few core differences that you need to be aware of if you want to start passive investing in real estate. It can be easy, if you haven’t been a real estate investor before, to aim for a passive real estate investing strategy and wind up with a very active strategy by mistake.
While both options can be rewarding, it’s important to know how to get the kind of investment strategy you’re going for right from the get-go.
The biggest difference between passive and active real estate investing is how much control you have over the investment.
An active real estate investor needs to make decisions about the properties they own, how they are going to make money on that property. Active investors may even be involved in remodeling or repairing the properties they own, and often make management decisions, approve tenants, design marketing campaigns, and are otherwise directly involved in making a property profitable.
A passive investor, on the other hand, only needs to provide investment capital. Essentially you are giving your money to a specific person, project, or trust, so they can execute their money-making strategy. In return, you get a portion of the proceeds.
Passive real estate investing often involves investing in rental properties and other opportunities for long-term profits. You can also invest in developments, or even properties that are going to be sold for a more immediate one-time profit, but those kinds of strategies generally take more ongoing research and effort since you need to find a new opportunity as soon as the property has sold.
However, the main drawback of this kind of investing is that you are giving up your control over the profit potential and management strategies. You have to trust that your investment will be taken care of, and accept the risk that your investment won’t generate the kinds of profit you were hoping for, especially if the market changes or the property is badly managed.
Types Of Passive Real Estate Investing:
There are a lot of ways to passively invest in real estate, and choosing the right option, or combination of strategies, is critical to getting good returns on your investments.
REITs
Real estate investment trusts, or REITs, are trust companies that invest in a range of real estate, often commercial real estate, and pay out profits as shareholder dividends.
This is often one of the most passive forms of real estate investment, but they are also a low-risk low-reward style of investment. Consistent returns are often emphasized over high profits with this investment strategy.
Crowdfunding
Crowdfunding is an investment strategy where you and other investors pool your money to purchase property you wouldn’t otherwise be able to afford. There are online platforms designed to make real estate crowdfunding easy and anonymous, though you can also purchase property through an LLC or another business vehicle with acquaintances or other investors you know if you want to.
Often crowdfunding investment focuses on investing in mortgage loans and then reaping a portion of the profits as the loans are paid off.
Real Estate Funds
Real estate funds are a mutual fund that invest in real estate securities, REITs, and other kinds of investment. They are generally very diverse, and may not only include commercial real estate.
The big advantage of these funds is that they are actively managed by professionals, so you don’t have to do a lot of research. A portion of your investment money is paying other people to do that research for you.
Remote Ownership
Lastly, remote ownership is considered passive, but may require more work from you than other strategies.
This is where you purchase a property, generally a rental property, but hire a property manager to handle all the details of taking care of that property.
This option gives you more control, but you still run the risk of mismanagement and requires you to be relatively knowledgeable about the market and best business practice as a landlord.
Generally, remote ownership also requires more upfront capital or the added risk of taking on a mortgage, so it has a higher barrier to entry.
Pros And Cons Of Passive Real Estate Investing
There are a lot of pros and cons to consider, so here are some of the key factors to take into account before you get started.
Passive Real Estate Pros:
- Lower Barrier To Entry
- Most Passive Real Estate Investment Options Have Better Liquidity
- You Don’t Need To Spend A Lot Of Time On These Investments
Cons Of Passive Real Estate Investment:
- Lower Profit Potential
- Less Control Over Your Investment
- You Can’t Control Changes In The Real Estate Market – Or The Coping Strategy Investment Managers Choose
Can You Make Good Money With Passive Real Estate Investing?
Yes, but there are some things you’ll need to do first if you really want to make a good return on your investments. For one thing, you need to make sure you understand the real estate market well enough to choose good properties and to know when a deal isn’t worth the risks associated with the investment.
You also need to have some patience. Often when people start trying to build passive income they are hoping to be an overnight success, and that’s not very likely with any investment strategy.
When it comes to real estate, chances are that you’re going to start small and have to work your way up to investing in larger deals and more lucrative properties.
It’s okay if it takes a while to start making the kind of money you’re hoping to. Remember, one of the biggest advantages of passive real estate investing is that your investment doesn’t need to take up all of your time. You should still have the time and freedom to work a regular day job while you work on adding to your investment portfolio and increasing the earning potential of your real estate investments.
Ready To Start Passive Real Estate Investing?
If passive real estate investing sounds like a good idea, whether you’re looking to go full-time or just hoping to supplement your existing income, Teifke Real Estate can help. Our coaches will help you find the right investment strategy for your goals, available resources, and time commitments, and we can continue working with you however long you want a little extra help with your investments.
The sooner you start investing, the sooner you’ll start making money. Don’t wait, call us right away.
Sources:
- Matthew Frankel CFP. How to know if passive real estate investing is right for you? The Motley Fool. https://www.fool.com/investing/stock-market/market-sectors/real-estate-investing/passive-investing/. Accessed January 16, 2023.
- Perlman E. Council post: What it takes to become a full-time passive real estate investor. Forbes. https://www.forbes.com/sites/forbesrealestatecouncil/2021/06/01/what-it-takes-to-become-a-full-time-passive-real-estate-investor/?sh=3e548e21107e. Published June 1, 2021. Accessed January 16, 2023.
- Young R. What is passive real estate investing? AB Capital. https://trustabcapital.com/passive-real-estate-investing/. Published April 10, 2020. Accessed January 16, 2023.
