Passive Real Estate Investing Basics
Investing in real estate doesn’t always involve flipping or renting out houses. Find out how to add passive real estate to your portfolio.
Real estate investing takes plenty of time and effort. And, though it can make you a lot of money, it also involves a great deal of risk. Buying a house, managing rental properties, and flipping homes all require you to put up a significant amount of cash and maintain an active commitment.
But what if you want to get into real estate without learning the industry or dealing with the stress of owning property or being a landlord? Passive investing allows you to get in the game with a more hands-off approach. In this article, we’ll give you an overview of how it works, the types of passive investments, and highlight key pros and cons.
What Is Passive Real Estate Investing?
Passive investing is a way to get steady cash flow without directly managing properties. It often involves putting your money in professionally managed entities, such as real estate investment trusts (REITs), syndications, or crowdfunded projects.
As a landlord, you can also take steps to convert your rental properties into passive income streams. To do this, you’ll typically have to hire a property manager to handle day-to-day duties, such as maintenance and corresponding with tenants.
The primary benefit of investing passively is that you won’t have to actively manage a property. This takes a lot of stress off your shoulders by not having to worry about renters or a mortgage. It also makes it more accessible to people who perhaps aren’t exceptionally knowledgeable about real estate, but still want a slice.
Ways to Invest
There are several ways you can begin investing in real estate passively. Below is a breakdown of the most common ones:
Real estate investment trusts (REITs) are companies that purchase, own, and operate income-generating property. This includes commercial buildings, such as office buildings, warehouses, and apartments.
They’re a popular method of dabbling in the market without the trouble and work that accompany ownership. They also pay dividends to shareholders annually. According to the U.S. Securities and Exchange Commission (SEC), REITs must pay at least 90% of their taxable income to shareholders each year. This makes them reliable income-generating assets, no matter which one you select.
REITs are often publicly traded and are, therefore, very accessible. It’s easy to invest in them through a brokerage account or a retirement account, such as a 401(k), IRA, or Roth IRA.
Real estate crowdfunding allows a large group to pool their money and buy income-generating property via private REITs. They’re a simple way for regular people to get some property in their portfolio at a low cost, taking place online on platforms such as:
- Equity Multiple
Be aware that crowdfunding platforms generally have minimum investment amounts. However, these can sometimes be quite low. Fundrise, for instance, only requires a minimum investment of $10.
Real estate syndication is another approach for multiple individuals to come together and invest in large projects such as apartment complexes and commercial property development. Each member contributes funds to a project and, once it’s completed, they receive income according to how much they invested. A person or company called a syndicator will usually oversee the project.
Much like crowdfunding, syndications are a way to further diversify and add real estate to your repertoire without directly managing a property or being the sole owner. However, each person also shares a portion of the risk. Should things go awry, you can lose even more than you can gain.
Real estate mutual funds allow you to cast a wide net. These are professionally managed accounts that invest a group of investors’ money in a diversified portfolio. They often include a variety of REITs and other securities in the industry.
Like REITs, you can easily purchase shares of mutual funds via brokerage or retirement accounts. Because of their diversity, these typically offer stable, predictable returns. However, as the market goes down, the value of your stake could follow a downward trend.
Pros and Cons
Passively investing in real estate has a range of benefits, including consistent income and a low barrier of entry. But it’s not always the best option for everyone, especially if you’re the type of investor who wants to take home run swings. Here are some advantages and disadvantages to keep in mind:
- Regular income. Passive real estate investments often provide dividends, rental payments, or other forms of compensation on a predictable, steady basis.
- Low effort and knowledge needed. You don’t need to fix a leaky sink, deal with tenants, or be an expert. All you need to do is select an investment or hire a manager and begin collecting your income.
- Diversification. Real estate investments enable you to diversify your portfolio, helping you manage risk and ensure your returns stay positive.
- Low barrier of entry. You don’t have to come up with a ton of money to begin investing passively. Most investments, such as REITs or crowdfunding platforms, only require a small amount of money to get a stake in valuable income-generating properties.
- Not immune to risk. Real estate can be subject to a variety of risks. The biggest, though, is market volatility. If housing or commercial markets go down, you’ll likely see decreased returns.
- Not as lucrative. Since you only own a piece of one or more properties, you won’t see the kind of returns you would if you were a majority owner. This is one area where actively investing in real estate (i.e., flipping or renting) has an edge.
- Not as much control. Handing your money over to another party, such as a managed fund or a property manager, puts you at the mercy of someone else’s actions and decision-making ability.
What to Consider Before Investing
Looking before you leap is always a smart idea. It’s important to take some time to do due diligence before deciding to move forward with an investment. Market conditions, for example, fluctuate all the time. Occasions exist where investing in real estate isn’t necessarily the best strategy, while there are times when it’s better to buy.
For this reason, it’s good to meet with a financial advisor to develop a plan that works for you. They can give you specific expertise and insight on which types of investments, passive or active, may fit into your portfolio and which won’t.
If you’re unsure how to find an advisor, you can always try using a matching tool. Completing this free quiz, for instance, will match you with up to three vetted financial professionals near you.
Frequently Asked Questions
What is the difference between passive and active real estate investing?
Active real estate investing involves planning, building, maintaining, renting, and flipping properties. This is where, as an investor, you get involved in nearly all the activities and management of a property you’ve put your money into.
With passive real estate investing, you intentionally take a backseat and pick investments that provide income but require little effort to manage or maintain. Common strategies include hiring a property manager for rental properties, investing in REITs or mutual funds, or becoming a stakeholder in a crowdfunded project or syndication.
How much money do I need to invest in a real estate syndication?
Syndications often require a minimum of $50,000 as a minimum investment. However, this could vary by the syndication or platform you are with and could even be larger. Therefore, this strategy is probably more of a choice for individuals who have more money to put down.
What is the average ROI on a REIT?
According to a study on asset allocation diversification by MFS Investment Management, REITs saw an average annualized return of 8.90% from 2003 to 2022. This number puts them ahead of bonds and international stocks, and just behind small/mid-cap stocks. Despite experiencing a few significant dips over the past 20 years, like in 2008 and 2020, REITs have proven to be relatively consistent and have shown they can compete with other top asset classes.
Does Vanguard have a real estate ETF?
Vanguard offers an ETF that targets real estate, with the ticker VNQ. It matches the MSCI US Investable Market Real Estate 25/50 Index and, as of 2023, has an expense ratio of 0.12%.
Which is better, REITs or real estate mutual funds?
REITs and mutual funds are both effective ways to invest in commercial property; however, they have varying advantages. REITs must provide regular dividends and, therefore, are good if you want some reliable income for the short term. Conversely, even though they sometimes have higher fees, real estate mutual funds have a better chance of appreciating because they include a wider array of investments.
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