If you are interested in real estate investing without playing an active role in managing tenants, toilets, or termites – this post will give you a detailed understanding of the steps you can take to get involved in passive real estate investing.
What is Passive Income?
The underlying goal of many investors interested in passive real estate investing is to earn passive income.
But what exactly is “passive income” in the first place? Let’s get to the basics. Passive income generally refers to a source of income that generates an additional income stream or investment.
For example, dividends you receive from investing in stocks would be considered a form of passive income.
There are many passive income streams present for you to tap into in today’s age, including one of the most powerful passive income investment vehicles out there- real estate.
Active vs Passive Investing
In the world of real estate, there are two very different types of investing: active vs passive investing. When you think of investing in real estate, the first thing that might come to mind is buying and operating a rental property for tenants. If this sounds like something that interests you – then it’s an active investment! But if not- passive investments include putting money into an already established portfolio with someone else doing most of the work.
What is Passive Real Estate Investing?
Passive real estate investing is when an investor provides capital to active investors that are responsible for operating and managing the real estate investment on their behalf.
Unlike owning a rental property where you are responsible for the performance of your investment, as a passive real estate investor, you can leverage the skills, knowledge, and resources of a team of expert active investors. Active investors would be responsible for the hard work of finding the real estate property, managing the day-to-day operations, and ensuring the investment is successful for passive investors.
The Benefits of Passive Real Estate Investing
Passive real estate investing can be one of the most powerful ways to make your money work for you. Passive real estate investing is a great opportunity for investors who want to get into real estate without having the time or expertise to manage the property themselves. Investors are able to put their money behind a lucrative investment, and then reap passive income on top of that! Please take a look at a few of the many benefits passive real estate investing offers to investors:
5 Benefits of Passive Real Estate Investing
- Earning passive income
- Tax benefits
- Leverage the experience, skills, and knowledge of experts
- Safer investment – real estate is a tangible asset
The Responsibilities of a Passive Real Estate Investor
Can real estate investing really be passive? Please note that passive real estate investing is not a get-rich-quick scheme, and any investment you make, even if it’s “passive,” does not mean you do not have to put upfront work in to find the right opportunity that matches your financial goals.
Even though your investment’s day-to-day management and performance are not resting on your shoulders, it is a passive investor’s responsibility to understand the type of investment vehicle they are investing in and who they are investing with.
Please take a look at the passive real estate investing process below.
Passive real estate investing process:
- Identify the type of passive real estate investment vehicle that meets your financial goals (REITs, syndications, crowdfunding, etc.).
- Do your homework on the team you want to invest with.
- Analyze the investment opportunities offered and identify the right project to place your capital.
- Sign the paperwork and wire the funds.
- Sit back, and enjoy passive income!
Not only do you need to research the type of property or fund you are investing in, but the most important decision you will make as a passive real estate investor is who you are investing with. You need to ensure that the individual or organization you’ve hired is trustworthy and well-equipped to deliver positive results.
Ways to Get Involved in Passive Real Estate Investing!
You can get involved as a passive real estate investing through a variety of vehicles, including:
- Real Estate Syndications
We will explain each of these passive real estate investing vehicles below, how they relate, and how they differ.
Think of REITs as something similar to mutual funds, but instead of stocks, when you invest in a REIT, you are investing in one company that holds a portfolio of many real estate properties.
Buying shares of a REIT is excellent for investors who have less capital to start investing with. REITs typically are easy to get into, and they are liquid, meaning you can pull your money out at any time. REITs also have a highly diversified portfolio for real estate that includes offices, apartment buildings, hospitals, and much more. So, it gives passive real estate investors a wide array of access in terms of investment opportunities.
A downfall to REITs is they do not allow passive real estate investors to take hold of many of the tax benefits that real estate offers, such as depreciation.
REIT investor dividends are paid to passive real estate investors as taxable income, and investors cannot offset their taxable income with depreciation. When it comes to real estate syndications, passive real estate investors are owners of the property. They, therefore, can utilize the depreciation of the property to offset their taxable income, saving them thousands in taxes.
2) Real Estate Syndications
Real estate syndications are formed for various real estate asset classes, including apartments, mobile home parks, self-storage units, new development, and more!
With real estate syndications, a passive real estate investor will choose who to invest with and which particular property they want to invest in. This control allows investors complete visibility and transparency of their investment.
Once investors have identified the real estate syndication they would like to invest in, upon completing the necessary paperwork and the wiring of funds, it is the responsibility of the real estate syndication company to actively manage the property and ensure the syndication is successful for passive investors.
Along with being completely hands-off, passive investors can have a considerable tax advantage by contributing to syndication. Being a passive investor in a real estate syndication, you will be part-owner of the property. Ownership allows passive investors to benefit from the depreciation of the real estate property. Depreciation is a complicated process, but in short, it’s the perfect way to deduct property costs directly from your taxes- even if you are a passive investor! Passive investors in real estate syndications can utilize the depreciation of their investment to offset their taxable income, saving an investor thousands of dollars in taxes.
Real estate syndications are a powerful way to grow wealth as a passive real estate investor and tend to outperform other passive real estate investment options. In most real estate syndications, you will see an average of 6-10% passive income distributions each year on your investment along with the appreciation of your real estate property, which will increase your returns on investment when the property is sold.
Here at Disrupt Equity, our last five multifamily real estate syndications have provided our passive investors with over a 40-55%+ annualized return on each project! And that is the beauty behind passive investing real estate syndications.
Sounds great, right? Why are not more people involved in real estate syndications? The high minimum investment to get involved in syndication is one of the main reasons an investor would not participate in this passive opportunity. In most cases, to participate in a real estate syndication, you need 25-75K as a minimum investment to get involved in a project. This aspect puts a barrier to entry for real estate syndications.
The Bottom Line
If you’re focused on building a passive income stream and understand the power of real estate – then it sounds like you are headed in a great direction.
Passive real estate investing is an incredible way to access the benefits of real estate without having to do the hard work of managing properties yourself.
However, as shown in this article, passive real estate investing comes with the responsibility of finding the deal and team you want to invest with! When other parties or organizations are handling your investments for you, you should have a hand in ensuring you are partnering with a well-equipped team that you trust. This will ensure that you have a clear path set out for yourself and your passive real estate investing portfolio!