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If you ask any investor what the most reliable, intelligent methods of building wealth are, there’s a good chance that investing in real estate will be on that list. Indeed, millions of people in the U.S. and worldwide are using real estate investments to increase their wealth and diversify their portfolios (real estate has, historically, beenrelatively recession-resistant).
However, the time constraints that most people face today — careers, families and social lives all vying for our attention — leave little room for the average individual to search for excellent real estate properties, work with the lender to arrange the financing, lease tenants, handle maintenance requests and more.
Passive real estate investing can create the ability for individuals to invest in real estate without the stress or time constraint of operating the real estate property. This short guide will give you all the essential information you’ll need to get started as a passive real estate investor.
Passive Vs. Active Real Estate Investing
There are two types of real estate investing: active and passive.
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When you think of a real estate investor, you might picture someone that owns rental properties, manages their tenants, collects rental income, handles maintenance requests, so on and so forth. This example is someone that is an active investor.
By contrast, passive real estate investing is where the investor doesn’t work in any of their investments. When you buy Apple stock, you don’t automatically work for Apple. Stocks are a passive investment. Similarly, you can purchase real estate in the same way (more on this below).
Therefore, active investing means you actively work in your investment. Passive investing means you contribute capital but minimal to no work other than finding the right opportunity.
Nowadays, investing passively is as simple as joining a real estate syndication. Real estate syndications are groups of real estate investors who partner to make a more significant real estate purchase than they could individually. For example, a 350-unit apartment building might be hundreds of millions of dollars. Either one person could buy that, or a syndicator could bring passive investors together to create a syndicate, and then each take a proportional percentage of the profits.
Syndications have two types of partners: general and limited. General partners are the ones that put together the deal, and limited partners are the passive investors. They invest capital upfront and receive regular payments on their investment.
When it comes to passive real estate investing, the main benefit, of course, is that you don’t have to work anywhere near as much (you do, of course, have to find the investment deals, though). A passive investor can write a check and enjoy the investment returns, which can be pretty substantial for real estate deals.
Another benefit is that you do not have to be an expert on real estate. However, investing actively would require you to thoroughly understand the market and how to identify which deals are good and which ones won’t make money. That’s hard to do, especially if you have a full-time job. With passive investing, you don’t need to be an expert in real estate — all you need to do is find a quality investment opportunity from the right investment team that does.
Potential Drawbacks
Passive real estate investing may not be right for every investor. When you opt-in for passive real estate investing, you lose a lot of the control of the management of the investment in terms of how the renovations are done, rental policies, the hiring process, etc. If you have the knowledge, skill set and time to acquire and manage real estate properties actively, it may be in your interest to be an active real estate investor rather than a passive one. If you’re interested in actively syndicating your own real estate deal, we recommend checking out our full guide: How to Syndicate a Real Estate Deal.
Additionally, passive real estate investing through a real estate syndication can have a financial barrier to entry that may not be right for everyone. In real estate syndications, the minimum investment can be as high as $25,000, which may not be right for an investor just starting off.
The Process
If syndication is of interest to you, take a look at our guide,How to Find the Best Real Estate Syndication Companies (and Deals), for more insight into where to look to find reputable, trustworthy groups in the industry. Once you find a real estate syndication company that you like, know and trust, here’s the process you would go through as a passive investor:
• You’ll receive information from the syndication team about an investment opportunity.
• After reviewing this information, you’ll typically visit the offering page with the investor documents (PPM, company agreement and “reserve” your spot in the real estate project).
• Once you’ve submitted your documents, you’ll receive the instructions to wire your funds.
• Upon closing of the deal, you’ll receive quarterly or monthly updates and financials on the project. You’ll also receive regular distributions, which are your share of the profits.
• At the end of the year, all limited partners receive a K1 to file with their taxes to take advantage of the tax advantages of real estate such as depreciation.
As you can see, the most challenging aspect of being a passive real estate investor is choosing a qualified investment team. With that, and after signing and funding, a passive real estate investor will have little involvement.
In summary, if you are looking to earn a decent return on your money without putting the effort into property ownership, a passive real estate investment may be right for you.
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