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Are you thinking of venturing into a less involving investment to earn extra income? Consider passive real estate investing. It requires no time commitment, hefty capital, deals sourcing, or property management. This financial engagement is ideal if you have a family and/or a full-time job.
Although the day-to-day tasks aren’t part of your engagement, you must contribute some funds. You can obtain this capital from a syndication firm (real estate group). Most importantly, you must conduct proper research before investing in this passive business.
If you’re new to this, our article explores this type of real estate investing and provides comprehensive information that helps to know if making that move is the right thing to do.
Let’s dive in!
What Is Passive Real Estate Investing?
Passive real estate investing is a transference venture involving entrusting your capital to another person who manages the real estate assets on your behalf. Your involvement as an investor typically stops at your putting money into the investment ‘bag.’ Hence, your daily attention isn’t necessary, making it ideal for retirement savings and other long-term goals.
You can passively invest in real estate in various ways, including crowdfunding opportunities, real estate investments (REITs), real estate funds, and remote ownership. The ventures allow you to earn extra cash without engaging in hands-on tasks.
How Does Passive Real Estate Investing Differ From Active Real Estate Investing?
Passive real estate investing differs from active real estate investing, as tabulated below.
| Factor | Passive Real Estate | Active Real Estate |
| Risk and liability | Limited | Unlimited |
| Financial skills | Not required | Required |
| Control | Hands-off | Full control |
| Time Commitment | Not needed | Needed |
| Profits | Less returns | Significant returns |
| Diversification | Achievable | Unachievable |
| Cost | Less expensive | Very expensive |
Let’s elaborate a little bit on the above differences hereunder.
1. Risk And Liability
Both passive and active real estate engagements have risks. Nonetheless, the extent varies in each case.
The passive option spreads the risk to the sponsors (general partners) and other investors. Hence, your liability as a passive investor is limited to your capital. If anything goes amiss, the general partners bear the liability since the asset lies in an LLC.
On the other hand, active real estate investors are fully liable if anything goes wrong. Consequently, you may lose the asset in question and other personal property.
2. Financial Skills
Good real estate investing returns result from proper management decisions and cash flow analysis. That calls for adequate skills and experience in the field. Therefore, you must be a financial analyst expert and be conversant with the property management best practices to operate as an active investor.
On the contrary, you don’t need financial skills and know how to invest as a passive stakeholder. You simply entrust your capital to the industry’s professionals who do the rest of the job for you.
3. Control
All the control lies in the hands of the active investors. They run the business’s day-to-day activities, including sales and tenant management, property selection, and renovations.
Contradictorily, your involvement as a passive investor is hands-off. You simply hand over your capital to active real estate experts who do the job well!
4. Time Commitment
Since the active investors are directly involved in the daily operation and management of the property, you have to spend significant time on the job. Alternatively, you can ensure that the business is up and running by hiring maintenance personnel, property managers, contractors, and other essential professionals.
Thankfully, you don’t need to commit your time as a passive investor as all the work is taken care of by the general investors. Hence, you can fully concentrate on your other lines of engagement as you wait for the quarterly returns.
5. Profit
Every investor aims to reap some good returns after investing. Investors in both versions of real estate investing share profits. Nonetheless, the passive investors’ returns are relatively low.
For the active investors, returns are significantly higher since they bear all the risk and all the liability is on them.
6. Diversification
If you’re a new member of the passive investor circle in real estate, you may wonder if you can invest in a different field outside your specialization. The answer is YES!
It’s far much easy to diversify your investment as a passive investor. Why? You don’t have to have the know-how of the various fields since you’ll bank on your different professional teams’ research and intellect.
The case is different for active real estate investors. You need to be knowledgeable about the market and property class to excel. Tasks discharging also require specialization in this particular field. Therefore, diversification may be challenging.
7. Cost
Like any other venture, real estate investing incurs transaction costs. Between the two strategies, the active option is significantly more expensive.
Active investors’ expenses are higher because they need to cater to current, potential, and unforeseen expenses for the property in question. Also, capital reserves and emergencies add to the overall cost. Where the expense exceeds your reserves, you’ll have to put in more funds, deal with an insurance service provider, or even have both.
The cost can’t go beyond your capital investment as a passive investor. If any unpredicted situation arises that exceeds your capital, you’ll only have your returns reduced. There’s no additional cost charged on limited partners.
Benefits Of Passive Real Estate Investing
Passive real estate investing benefits you in various ways, including the following.
- Time efficiency: Passive investing requires no time commitment. Hence, you can have it alongside your other engagements.
- Lack of skills limit: You need no skills or experience, as you rely on the research and expertise of the active investors.
- Lower risk: Your risk is limited to your original capital. If things go wrong, the liability lies on the general partners.
- Reduced cost: Since you don’t handle the daily management, your transaction cost is significantly low.
- Less capital: You can start your investment with a small amount of money, where you buy a few shares under crowdfunding real estate.
- Allows diversification: Passive real estate lets you invest in various ventures and thus increasing your income sources.
- Enhanced transparency: As a passive investor, you can see the property in an index fund.
Risks Of Passive Real Estate Investing
This investment strategy has some drawbacks, as outlined below.
- Hands-off control: Since your responsibility stops at capital contribution, you leave the vital investment decision-making function in the active investors’ hands. You’ll have to bear with any poor decision made.
- Lower returns: Passive investors’ risk is limited to their investment capital, while any additional loss lies with general partners. Consequently, their returns are relatively lower than their active counterparts.
Types Of Passive Real Estate Investments
We have a few different ways in which you can passively invest in real estate, as indicated below.
1. Real Estate Investment Trusts (REITs)
REITs are companies that operate and finance real estates that generate income by gathering capital from various investors. Individual investors earn annual shareholders’ interest from the investment without being actively involved in buying, financing, or managing the properties. However, REITs’ growth and appreciation are relatively low.
2. Real Estate Syndication
Real estate syndication comprises sponsors (general partners) and passive investors (limited partners), pulling their capital together for investment purposes. The general partners are responsible for the daily operations and the business plan execution.
On the other hand, the limited partners’ involvement ends at capital contribution. It gives them entitlement to returns, ownership, and tax benefits. Additionally, their risk is limited to the capital; hence, they have little investment control, if any.
3. Crowdfunding
Crowdfunding is a real estate deal where investors pool their small capital to invest in a new business venture. Sponsors/developers identify potential investments and collect funds from interested individuals (passive investors) as capital. They focus on one property at a time which includes single-family, commercial properties, and apartment complex portfolios.
4. Real Estate Funds
Real estate funds refer to a type of mutual fund investing in public real estate securities, including REITs. Nonetheless, they have a longer investment term than REITs, and the investors benefit through appreciation instead of dividends.
Moreover, real estate funds allow investment diversification in properties besides commercial ones. Their managers are professionals, saving the investors the extensive research hustle.
5. Real Estate Remote Ownership
Remote ownership is a partially passive real estate investment. Unlike the above four types, the investor has some control over the daily management. How? They can own property and oversee an on-site property manager who does the rest of the job. Such investors monitor the proper over the phone or digitally.
What’s Best For You?
All the above types of passive real estate can make a significant investment deal. If you’re a starter, the best thing is to weigh the benefits and risks of each, to make an informed decision. Also, consider your capital, goal, and time commitment to pick the ideal option.
Conclusion
So, is passive real estate investing right for you? The two investing strategies are great ventures. However, you should consider your special engagements and situations, interests and goals, capital in hand, and specialization.
Passive investing is the way to go if you currently have a tight schedule job in a different field and wish to invest in real estate. It’s also ideal if your capital is small.
On the other hand, you may want to venture into real estate as your full-time job. In this case, the active investor option is best as it requires more time commitment.