Passive Real Estate Investing – Ultimate Guide

Investing in real estate doesn’t have to turn you into a landlord. If you’ve got better things to do, you can own real estate without lifting a finger.

Updated
August 23, 2022
by

HoneyBricks is on a mission to unlock the potential of real estate investing. We are rebuilding the real estate investment experience, making buying, earning income, and selling income-producing real estate instant, low cost, and enjoyable.

What interests you about real estate investing? Maybe you’re attracted to real estate’s passive income potential, which entices many investors. If you don’t want the responsibilities of a landlord, or have limited cash to invest, then passive real estate investing may be worth exploring.

But not all real estate investing is truly passive, so your first move as investor is to fully understand passive investing in real estate. 

Keep reading to explore the basics of how to passively invest in real estate, including pros and cons and steps for getting started with your first passive real estate investment.

In this article:

What is passive investing in real estate?

Investing passively in real estate is a strategy that provides direct exposure to real estate without incurring an obligation to actively manage an investment property or real asset.

Passive investors in real estate may own real estate directly or indirectly through a variety of ownership structures or investment vehicles.

Real estate is a popular asset class for investors because rental income can generate long-term passive income streams that are relatively stable. Passive investors may receive somewhat lower returns in comparison with active investors, who perform all the work themselves in lieu of paying property or investment management fees.

Passive investors in real estate may never see the investment properties they own. Teams of professionals oversee the finer details of real estate ownership, leaving passive investors to focus on the fundamentals of the rental property as an investment. 

Passive vs. active real estate investing

Investors may perceive that all real estate income is “passive,” as even direct owners of real estate enjoy some of the same benefits as passive investors. Both active and passive investors have the responsibility to thoroughly research a rental property before investing.

Active and passive real estate investing have some key differences:

Active real estate investing:

  • Directly owning real estate requires significant upfront work and investment, with income streams from reliable tenants becoming more passively earned over time. 
  • Completing a purchase may also involve a lifestyle change
  • Active real estate investing can be a full-time job. Some active investors “flip”—buy, fix, and sell—real estate as their occupation. Passive investing in real estate provides a truly passive income stream, enabling investors to hold any occupation. 

Passive real estate investing:

  • Requires primarily only investment capital
  • Passive investors in real estate never assume any landlord responsibilities. Instead, passive investors rely on professional property managers to actively manage tenants and maintain the rental properties.
  • Passive investing is generally more liquid. Passive investors can trade in and out of real estate positions, usually with few restrictions, while active investors may be obligated to sell a property outright to liquidate.

Ways to passively invest in real estate

Investors who want to passively invest in real estate have several options. Let’s dig right into the many ways to own real estate as a passive investor.

Real estate investment trusts

A real estate investment trust (REIT) is an investment vehicle that’s designed to pay dividends from rental income to real estate investors. Passive investors can buy shares in a REIT in the same way that they buy stock in a company.

REITs are required by the Securities and Exchange Commission to distribute at least 90% of their taxable income as investor dividends. REITs are professionally managed by teams that include property and investment fund managers, meaning that investors can use REITs to gain totally passive exposure to real estate.

Investors can choose which REITs to invest in, but don’t have the flexibility to select specific real estate investments. REIT portfolio managers choose and manage the specific properties, which can range from large apartment complexes to shopping malls to industrial facilities. REITs are more likely to invest in high-quality commercial properties rather than private residential real estate.

Real estate funds

Real estate funds are investment funds that focus on real estate companies. Real estate funds, which may invest in REITs, are most commonly exchange-traded funds (ETFs) or mutual funds. Passive investors can add one or more real estate funds to their portfolios without having any obligations to physically manage a property.

Real estate funds themselves can be actively or passively managed, with actively managed funds generally charging higher fees. A passively managed fund may track a real estate index like the Dow Jones U.S. Real Estate Index, while the real estate investments of actively managed funds are directed by financial professionals.

Another fund investment option for real estate investors is a real estate-focused private equity fund. Investing in a private equity fund can generate attractive returns, but the upfront capital requirement—typically $100,000 or more—is prohibitive for many investors. Private equity investors also typically pay management and performance fees to professional investment teams.

Crowdfunded real estate 

Passive investors can gain real estate portfolio exposure by investing in crowdfunded real estate, which can range from multifamily housing to commercial and industrial properties. Crowdfunded real estate is real estate that’s been fractionalized—virtually divided into small portions that are funded by “crowds” of investors.

Investors in crowdfunded real estate can evaluate specific properties for investment, and directly own portions of real estate assets. Crowdfunding platforms work directly with real estate sponsors, who are responsible for the active management of the property.

Traditional crowdfunding platforms fully control the relationship between real estate sponsors and investors. Investors using these platforms are obligated to trust that the crowdfunding platform is conducting itself correctly.

Tokenized real estate

Another option for passive real estate investors is to buy tokenized real estate. Real estate that’s tokenized is generally also fractionalized, and uses blockchain technology to optimize the investment process. Investors in tokenized real estate directly own portions of specific properties, with real estate tokens representing their ownership stakes.

Blockchain technology can improve many aspects of the real estate investment process, making it easier for investors to passively invest in real estate. Blockchain tech can improve the transparency, efficiency, and security of investing in real estate, and ensures that private fund or platform managers don’t exert too much control over investors’ holdings. 

Real estate tokenization platforms like HoneyBricks leverage blockchain technology to support both real estate sponsors and investors, enabling more direct and useful interactions. Passive investors still need to do their homework before investing, but can use real estate tokens to invest in many diversified properties.

Pros and cons of passive real estate investing

Investing passively in real estate has both advantages and disadvantages. Here are some of the major pros and cons for this investing approach:

Pros 

  • No landlord duties: Passive investors in real estate only provide investment capital, rather than engaging in the operations and maintenance of a property.
  • Opportunities to easily diversify portfolio: Investors can gain exposure to multiple properties by using one or several passive investment strategies. 
  • Access to affordable investments: Passive investors frequently have access to fractionalized ownership opportunities, which can make real estate investing affordable for more investors.

Cons

  • Less control over investments: Passive investors generally exercise less control over their real estate investments. Depending on the investment strategy, passive investors may not be able to choose specific investments.
  • Potentially higher fees: Passive investors typically pay investment or property management fees for the convenience of passively investing. An investor’s fees can vary greatly depending on their investment strategy.
  • No physical ownership: Passive investors don’t physically own any property, so they can’t rely on their real estate investments if they need somewhere to live in an emergency. 

How to start investing passively in real estate

You may be wondering how to get started as a passive investor in real estate. You have several investment strategies available, and can follow these steps to begin your investing journey:

1. Assess your current portfolio. What are you currently holding? Your first step is to evaluate your current investments, including any real estate exposure that you may have already. Review both the composition and performance of your current investment portfolio.

2. Determine your investment goals. As a passive real estate investor, what are your goals? Your second step is to determine your major investment priorities. You may be focused on maximizing your short-term passive income, or might be more interested in long-term capital appreciation. Taxes or investment fees may be particular concerns for some investors.

3. Develop an investment strategy. Your next step is to develop a specific strategy for passive real estate investing. You need to decide how exactly to invest in real estate, and then select specific investment funds or opportunities to execute on that strategy. Ample research is required to complete this phase.

4. Execute the investment strategy. Whenever you are ready, you can initiate and complete the relevant transactions to implement your investment strategy. You may use one or more platforms or brokerages in this step, depending on your investment approach. 

5. Monitor your real estate portfolio. With one or more real estate investments added to your portfolio, your work as a passive investor is largely complete. You can monitor the performance of your holdings, and make any adjustments to your portfolio as needed.

Should you passively invest in real estate?

Passive exposure to real estate can be appealing to investors who don’t want the many responsibilities associated with property management. Passive income streams from real estate can be reliable, even in volatile markets, over long periods of time.

Investors who choose passive real estate investments may pay for the convenience by accruing lower returns, and likely won’t get as many tax benefits. Every investor needs to do their own research when it comes to developing an investment strategy, as it’s important to pursue an investing approach that’s just right for your needs.

About the Author

Allie Grace Garnett

Allie is a financial writer, editor, and content strategist with a background in traditional finance. She has contributed to publications including Investopedia, The Motley Fool, and The Balance.

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