When most people think of real estate investing, they picture themselves in front of bulldozers or making phone calls on behalf of tenants. However, there is another type of real estate investing that’s truly “passive”. Passive real estate investing doesn’t require a lot of time or effort from the investor. Not to mention, that investment just sits there silently earning you money (which is why it’s called “passive”). In this article, you’ll learn what passive real estate investing is, the types of passive real estate investments, and how you can start profiting today.
What Is Passive Real Estate Investing?
Passive real estate investing is where you invest money into a property without having to manage or own it yourself. A few strategies for passive real estate investing are REITs (real estate investment trusts), real estate crowdfunding, private money lending, or real estate syndications.
When it comes to traditional active investment strategies—like flipping homes or managing rental properties—the profit depends on how well you do things like renovate houses and find tenants who pay rent on time. But, as a passive real estate investor, if you’re working with a team of experts (like we’ll discuss later), then all that stuff falls into place without your involvement at all.
Active vs. Passive Real Estate Investing
One way to think about it passive investing is that passive investors are hands-off, while active investors have their hands in the dirt.
A passive real estate investor is not a landlord. They don’t own or manage properties; they simply invest in them. A landlord is an active real estate investor who owns and/or manages properties.
It’s also important to note that being a landlord doesn’t necessarily mean being an active real estate investor (although it often does). Many landlords are more passive than others; they just want someone else to deal with all the hassle of finding tenants and managing repairs while they sit back and collect rent checks every month!
Pros and Cons of Passive Real Estate Investing
Unfortunately, passive real estate investing isn’t all multimillion-dollar returns without any work whatsoever. If you want to be a truly passive investor, you’ll need to know the tradeoffs, just in case active investing is more your speed.
Pros
- Passive investing means you have more time to focus on living your life, not finding and funding deals.
- If you don’t have a ton of real estate investing experience, passive investing may give you an education that comes with a healthy return.
- When problems arise at the property, you won’t be called, you simply need to let the management team handle it.
- If you already make a high income from a job that requires long hours from you, passive real estate investing could be a way for you to slowly break the golden handcuffs (without having to work two jobs).
Cons
- Passive real estate investing leaves you with much less control than if you were to buy a property yourself.
- You won’t have any say in how the renovation/remodels/renting is done; you’ll need to trust your team.
- You still need to spend time investigating the team or company that you’re giving money to.
- In most cases, you’ll make less money than active real estate investors, since the active investors have full control over the deal.
7 Examples of Passive Real Estate Investments
Interested in building some passive income profits? Thanks to the internet, there are far more ways to passively invest than ever before. Here are some of the top ways that (almost) any investor can start collecting that sweet sweet mailbox money.
1. REITs (Real Estate Investment Trusts)
Real estate investment trusts (REITs) are a type of publicly traded company that invests in real estate. The main difference between a REIT and other investments is that you don’t have any control over the property or manage any workers. The manager of your REIT handles all of that for you, so it’s more passive than managing an individual property yourself. You’ll get a quarterly dividend payment based on how well they’ve done with their investments each quarter.
REITs are usually split into two categories: equity and mortgage REITs. Equity REITs tend to see more appreciation with lower dividend yields, while mortgage REITs almost always see higher dividend yields and lower (if not negative) stock price appreciation.
Read more: If you’re choosing between investing in REITs vs rental property, check out our comprehensive guide on benefits, drawbacks, similarities, and differences between both.
2. Real Estate Crowdfunding
Crowdfunding sites like Fundrise allow investors to pool money together into a single project and receive periodic payments once it’s completed, usually within 5 years or so (this varies depending on what type of site you use). The best part about crowdfunding is that there are no upfront fees for investing; however, there may be additional costs associated with buying shares from these sites which means things like account fees could add up quickly if left unchecked over time (so make sure to check out those details before getting started).
3. Real Estate Mutual Funds
Real estate mutual funds are another incredibly passive way to invest in real estate. The mutual fund managers will focus on finding, funding, renovating, renting, and refinancing the deals, so you don’t have to. Some mutual funds are industry-specific, so you can invest in a certain type of real estate (like self-storage, multifamily, retail, etc.) that you find the most interesting. Most real estate mutual funds are run by investors with large teams and decades of experience, so you could be investing with the best.
4. Digital Real Estate
With digital real estate, you’ll never have to worry about tenant phone calls or leaky sinks! This sort of “Metaverse real estate” is mostly in the speculation phase, but could be worth a lot more in the future if businesses and individuals begin spending more time in the metaverse. You can use your digital real estate to advertise products, host events, or rent out your “property” for some passive profits. But, you’ll need to make sure you research which metaverse real estate investment is the most worth it, as many digital lands will fight to become the industry-leading favorite.
5. Joint Ventures and Partnerships
Joint ventures and real estate partnerships may not seem like a way to passively invest, but when done correctly, they can be one of the most passive real estate investments out there. The biggest barrier to entry? Knowing (and trusting) a successful active real estate investor. If you have the money but lack the skills or time, you can partner up with other investors to buy real estate, only you’ll need to make sure that your contract stipulates you as the passive investor, while the other party (or parties) are the active investors.
6. Private Money Lending
Private money lending is a phenomenal way to make a solid return without having to swing a hammer. Private money lenders usually work as “debt lenders”, meaning they are paid a fixed amount for their investment and do not retain equity in the property.
For example, a house flipper could need $50,000 to complete a home renovation, but lack the funds. You, the private money lender, could loan the house flipper $50,000 at 12% interest over a one-year term. The house flipper then takes the loan, does all the work, returns one year later, and pays you back your principal ($50,000) plus your interest ($6,000). Then you rinse and repeat!
Real estate syndications are a more advanced type of passive real estate investing. Real estate syndications can be thought of as a large, open investment where passive investors put money into a pile for an active investor to go and make a deal happen. Most real estate syndications require passive investors to be accredited (annual income of $200K+, net worth exceeding $1M). Due to this high barrier of entry, most passive real estate syndication investors are already wealthy individuals, either through their job or active investing.
How To Get Started in Passive Real Estate Investing
Passive real estate investing can be a low-effort way to bring in some great returns, but you’ll need to educate yourself to start. Join a local real estate investor association (REIA) or attend a real estate meetup in your city. Talk to active and passive investors and get their feelings on what type of investments work best in their experience. Then, get to know the active investors in your area who are looking for a passive partner.
There are plenty of online blogs (like this one!) and forums where investors will share their experience, knowledge, and advice for future passive investors. The most important part before you start? Understand each of the seven passive types of real estate investments and find the one that you think fits your lifestyle the best.
Passive Real Estate Investing in a Nutshell
Passive real estate investing is a way to earn income without doing a ton of work. You invest, lend, or partner up and get paid to wait. Then you recycle that profit into funding bigger and better deals. The longer your investment grows organically (without additional help from you), the better! As you make more money, do more successful deals, and build up your cash pile, you should be redeploying your profits to make more money. But as always, make sure you properly vet your investment company, partner, sponsor, or anyone else who wants to use your money. Passive real estate investing is profitable, but those profits are never promised.
