Passive Real Estate Investing- Ultimate Guide

September 3, 2020
September 3, 2020 disrupt

Passive Real Estate Investing- Ultimate Guide13 min read

You don’t need a million bucks to get into real estate investing and earn a lucrative living. Notably, investing in real estate, in general, can be the vehicle that could potentially lead you to a million-dollar income consistently.  Additionally, contrary to popular belief, you don’t have to spend a substantial amount of time to make real estate investing work for you, especially if you become an expert at passive real estate investing. 

So what exactly is passive real estate investing

Below, we will have a comprehensive discussion that explains passive real estate investing, types of passive income real estate investments, the pro’s and con’s of those opportunities, and helping to jumpstart your career as a passive real estate investor.

 

What is Passive Real Estate Investing?

First off, to clarify, passive investing does not mean that you do not need to do anything regarding your investments. Contrary to what the term suggests, it’s not as easy as picking an investment, putting your money in, and never thinking about it again. Although we all wish it was that easy.

Passive real estate investing simply suggests that you aren’t playing an active role in the business you’re buying. 

For instance, investing in stocks, you buy shares of cooperation, you do not play an active role in the corporation’s everyday operations. Rather, you merely benefit monetarily if the business/stock does well.  

The difference between passive investing in real estate investing vs stocks is that depending on your investment portfolio it can become increasingly more active than passive real estate investing. When investing in stocks it’s in your best interest to stay updated and educated on the corporation’s as well as the industry you are investing in. For passive real estate investing you are putting your money into a very stable asset class and no matter the variances of the market- everyone needs a roof over their head. 

While passive real estate investing can be a lucrative income stream to add to your portfolio, it is very important to bear in mind that when you invest passively, you must still do your homework or “due diligence” before and after investing your money in any real estate project.   

With that being said, if you are searching for an easy revenue stream, real estate can be among the best passive investment methods available, based on the opportunities described in detail below.  

Residual Income Explained

Residual income refers to income that is typically received monthly after all financial debts and costs have been paid for the service, product, or for the purposes of our discussions, property. Specifically, you contribute your resources into a property and enjoy a regular income stream from that financial investment. 

One of the most powerful ways to create residual income is through passive real estate investing. 

 

Benefits of Passive Income Real Estate Investing

There are countless reasons why passive real estate investing may be a good fit for you, but the top reason is as follows.  

  • You Do Not Have to Be a Landlord.  When you are a passive real estate investor you do not deal with any of the hassles and frustration of being a landlord. Notably, when a building floods or there is some other similar emergency at your building, it is not your responsibility to call a repairman and ensure that the emergency is handled. You can rest assured knowing that someone else is handling it.  
  • You Receive Tax Advantages From Passive Real Estate Investing  In an equity-structured financial investment, passive real estate investing allows for tax-deferred profits that can work to lower your taxes even as your income increases. Unlike stock dividends, which can be taxed at your highest income bracket, the potential pass-through advantage of real estate ownership allows your profits share of the depreciated asset to offset your income.  
  • You Don’t Have to Worry About Obtaining Financing  Obtaining financing is one of the most frustrating aspects of investing in real estate in general. Because the economic climate has slightly gone south, somewhat driven by the global coronavirus pandemic, banks have actually started to require much more documentation to obtain loans, and the process is both time-consuming and frustrating for investors.  However, when you are a passive real estate investor, your financial investment is typically tied to a professional real estate investing company that already has pre-existing partnerships and relationships with various lending institutions.  As such, the business is responsible for exploring and obtaining various financing opportunities, and not you.  
  • Your Passive Financial Investment Allows You to Leverage Other People’s Experience You always have the option to go about it alone when considering real estate investing. However, there is something to be said about leveraging the intelligence of other professionals in your network.  Some real estate investors devote their lives to discovering the in’s and also outs of the real estate market. Notably, passive real estate investing allows you to benefit from their comprehensive knowledge about the industry.  Not only that but in most cases, specifically in multifamily syndications, your syndicator or deal sponsor is investing alongside you. Meaning they want your investment to succeed just as much as you do. If you have a stockbroker, you will not get this safe luxury. 
  • Receiving Passive Income Distributions Passive real estate investing can be easy, provided that you conduct your due diligence, sign legally enforceable paperwork, as well as transfer funds immediately when needed; that’s basically your only duty as a passive real estate investor. Overall, you have the potential to generate passive income while you are building your career, on vacation or even while you are sleep! When buying multifamily properties with existing renters where there is existing cash-flow, your cash is working for your 24 hours a day, 7 days a week.  

 

Types of Passive Real Estate Investing Opportunities

Below is a breakdown of all of the various types of real estate passive investing opportunities. From this list you will have insight into which vehicle is best for your personal passive investment strategy!

Purchasing REITs

 A real estate investment trust (REIT) is modeled after mutual funds and is a business that owns, maintains, or finances income-generating real estate. In general, REITs pool the resources of numerous investors for a property or a portfolio of properties. In general, REITs can be a wonderful method to obtain direct exposure to residential or commercial property types that many private investors couldn’t afford to invest in indirectly

Equity REITs 

The most prominent and also widely known kinds of REIT are equity REITs that focus on acquiring, managing, and also developing residential investment properties. Because REIT limitations require that residential or commercial properties are held as well as created over a long period of time, their major resource of income is rental earnings from their holdings. They typically buy specific kinds of property, which generally come under the following categories: apartments, workplaces, information centers, healthcare facilities, and a lot more.  

Home mortgage REITs 

While home mortgage REITs are not as prominent as equity REITs, these funds finance cash to real estate investors or invest in existing home mortgage loans on properties, instead of directly purchasing the residential or commercial properties themselves.  

Hybrid REITs 

Hybrid REITs are a combination of both mortgage and equity REITs. Their profits originate from both rental and also the interest rate profits. 

 

Like all financial investments, there are advantages as well as negative aspects to REITs that ought to be evaluated before investing. REIT must pay 90% of income back to its investors. Therefore, just 10% of income can be reinvested back right into the REIT.  

REITs are counted as routine income at a much greater cost because REIT returns are not dealt with under the tax-friendly 15% guideline that many returns fall under.  

Financial investment risk can be substantial. As such, you must conduct your due diligence before investing and weigh all material factors in the local real estate market (i.e., residential or commercial property values, interest rates, debt, geography, and also altering tax regulations). 

REIT investors relinquish control of all the functional choices that a specific homeowner would make. 

Some REITs will incur high administration as well as transaction costs, leading to reduced payouts for investors. 

Real Estate Crowdfunding  

Real estate crowdfunding has dramatically become popular over the last couple of years. Here’s how the process works. 

An experienced real estate investor/developer (or deal sponsor) identifies an attractive real estate investment opportunity. The developer negotiates the property’s purchase, deals with lenders, and arranges for all necessary paperwork, etc. However, if the developer doesn’t have enough capital to complete the project, he or she may raise the rest of the fund from individual investors in exchange for financial interests in the project. This is known as crowdfunding. 

The downside to real estate crowdfunding:

  • Lack of Control. If you want to have control over your investments, property crowdfunding might not be for you. When you make the investment with crowdfunding, the development of the residential property will certainly be managed by somebody else entirely.  
  • Little Freedom to choose your project. As an investor, you will not be able to choose your investment when you contribute to a crowdfunding project. While it is true that you have the opportunity to pick the residential or commercial property. Once you join your chosen platform, the system, or the person that takes care of the residential or commercial property will choose.  
  • Illiquid Investments. Another drawback of passive real estate investing utilizing crowdfunding is that this type of investment is an illiquid financial investment. In other words, it means the investment cannot be conveniently sold for cash if the need arises. 
  • No Dividends and Low Liquidity. Unlike REITs that pay their investors dividends, participation in a crowdfunding property project does not distribute any kind of returns. Even though REITs are unpredictable, they are also a lot more liquid. Investors in REITs own shares which they can conveniently market.  
  • Risky and Unsecured Financial Investment., With crowdfunding, you are on your own when determining which platform to select and also which home to purchase. You may wind up wasting your cash. Not to mention that many crowdfunding investments are risky.  
  • Scammers. One more thing that makes crowdfunding risky is the substantial number of scammers in the industry. Since its a reasonably brand-new field of financial investment, you must research the platform and also vet the people behind it before investing your money.  
  • Hidden Fees. There are lots of hidden fees as it relates to crowdfunding. As an example, platform costs, building and construction costs, management charges, and so much more. In some cases, fees are so substantial that they undermine returns on the financial investment as such investors must be careful.  

Passive Income Through Multifamily Syndications  

A multifamily syndication firm gathers investors who assemble their monetary resources to fund large multifamily buildings.  In general, real estate syndications allow new real estate investors to buy a bigger property with much less capital to diversify their investments,  increase cash flow through passive income, and make more money. 

There are various benefits to real estate syndications, which makes it the most ideal vehicle for passive real estate investing over other options. Explore the facts below. 

  • Don’t have to be a landlord. Notably, multifamily apartment real estate syndications permit investors to avoid the landlord role altogether.  Investors can diversify their assets across several markets. For example, an investor can own an apartment complex in Chicago, and mobile park home in Texas, and an apartment complex in New York City. The combinations are endless.  
  • Investing in multifamily syndication enables a level of diversity you might not have the ability to attain by yourself. Investors can spread their money throughout numerous financial investments at a level of your choosing, thereby decreasing your overall financial risk. 
  • Access to Larger Investments. Commercial properties, such as multifamily apartment complexes, offer the potential for extremely high returns, however, at the exact same time, not many individuals have the financial ability to purchase these types of properties. Multifamily real estate syndication allows you to pool your money with other investors and offer you the chance to invest in an asset class that you would otherwise be priced out of on your own. 
  • You’ll Make More Money. The earnings are significantly higher than if you were leasing out a single-family home when you invest in a big multifamily property through a real estate syndication. In fact, you can make little increases in leasing with a greater return. When your money has been invested in multifamily real estate syndication, you gain profits in several ways.   
  • Liability Protection. Lastly, multifamily real estate syndications add another layer of protection via the LLC formed by the sponsor to obtain the property. Given that the majority of syndications have investors as passive or limited investors, the LLC safeguards them from any liability arising from the daily property operations as well as any financial obligation commitments. 

 

Is Passive Real Estate Investing Right for You? 

The primary drawback to passive real estate investing is that you have a reduced earning capacity compared with if you were an active investor but you also hold a lot less risk.

In general, with passive real estate investments, you’re paying the individual who is playing an active role with the investment project.   

Passive real estate investing, specifically real estate syndications, can be a wonderful means to create wealth over the future without the inconveniences of actually needing to be someone’s property owner or take care of a building and construction project. 

For many investors, it’s the very best method to go. Whether you are interested in playing an active role in real estate investing or becoming a passive investor in real estate, multifamily syndications can be a very lucrative investment opportunity to help grow your net worth and achieve your financial goals. If you are interested in becoming a multifamily syndicator or deal sponsor we highly recommend you check out this course that will walk you through step by step how to get started as a multifamily deal sponsor

We hope this article gave you insight into the types of passive real estate investment opportunities and helped to provide clarity if it is passive real estate investing is right for you and your family! For further content on how to get started as a passive multifamily investor end to end- check out this course. 

 If you are interested in investing in multifamily real estate syndications passively, please visit Disrupt Equity’s investment page here. On this page you can go through our Passive Investors Frequently Asked Questions as well as submit a form to be notified of our upcoming investment opportunities!

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