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Passively Invest in Real Estate: The Basics
Learning how to passively invest in real estate can be complicated. Start with the basics and give yourself a good foundation.
Madison Clifton
Jun 20, 2019
Until the end of time, people will always need homes. Due to this, real estate is a booming business and a great investment opportunity. Passively investing in real estate takes only slight dedication and commitment on your part. It is a way to get in on the money without exerting a ton of effort. You are probably wondering where you would even begin, or how to passively invest in real estate in the first place. That is why we are here. We will give you a quick run down on some of your options so you can get on your way to making your own passive investment in real estate.
What Exactly is Passive Investing in Real Estate?
A passive investment in real estate is an investment where you are not actively involved in the management or oversight of the property. You simply invest your money and get your returns. It is not recommended to skip out on your research though. Depending on how you choose to invest, and what property type you choose to invest in, will greatly affect how much money you are spending up front and what your returns will be like.
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Spend more time on the things that matter most.
Crowdfunding
Crowdfunding is a relatively new way to passively invest in real estate. It involves multiple individuals investing in one property, and then getting returns on that investment. The idea behind crowdfunding for real estate began with fundraisers like GoFundMe going viral. A significant number of people are willing to commit to putting forth a small amount of money towards something. This idea is taken and applied to real estate investments.
This is opening doors for investors who would not have been able to invest otherwise. Using crowdfunding, businesses are able to use social media platforms and websites to solicit their projects to investors. Platforms like PeerStreet create a marketplace that allow investors to access multiple real estate projects. Crowdfunding truly allows you to passively invest in real estate. You will never get a midnight call about a broken dishwasher or come to your “no pet” rental to find it filled with dog hair.
Due to current laws and restrictions by the Securities Exchange Commission (SEC) only accredited investors are able to participate in crowdfunding at the moment. Changes are being reviewed by the SEC in attempt to open up this market in the future. In a few short years to come, crowdfunding could revolutionize how people invest in real estate.
REITs
REITs stands for real estate investment trusts. These trusts allow individuals to invest in currently large scale profitable real estate. This can include shopping malls, hotels, warehouses and loans. REITs trusts do not develop properties to resell them like many real estate investments. They develop them to own and operate the property themselves. Investing in a REITs is a way to earn income off of commercial real estate without actually having to own or operate it.
When looking at investing in a REITs there are publicly traded REITs and non-traded REITs. Publicly traded REITs are listed on a major stock exchange and can be purchased using a broker. In most cases you can buy the common stock, preferred stock or debt security of a publicly traded REIT. When purchasing publicly traded REIT, normal brokerage fees will apply.
Non-traded REITs stock is quite different. It can not be seen on a major stock exchange. This stock can be purchased through a broker or financial adviser that participates in offering non-traded REITs stock. Buying this stock comes with exceptionally high up-front fees. Sales commission combined with the offering fees can total to nine to ten percent of the investment.
Owning a Property
Owning a property is the least passive method out of the three common ways to passively invest in real estate. How passive you are able to be honestly depends on how much money you have to outsource work. When buying a property to make money off of, you want to buy it for as cheap as you can. Then, you can make some renovations or upgrades and sell or rent it out to turn a profit on it.
Remodeling is where is gets tricky though. If you are not willing to do some work yourself, or do not have the experience to, you will have to contract the work out. This keeps the investment passive for you, but can get expensive very quickly. Once the property is ready to be moved into, there is the management of the property to be concerned with. You can absolutely hire someone to manage the property, but again that takes out of your profit.
While this may be the least passive way to invest in real estate, it is one of the most traditional methods of investing. Many people are able to successfully supplement their income, or earn their full income from renting out or flipping properties. You are also able to make this process as passive as you want if you have the funds to do so.
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Are You Ready to Invest?
Deciding to pull the trigger and invest can be a hard decision to make. There is always a level of risk involved and no one wants to lose their money. Always do your research so you know exactly what you’re getting into when investing. If you are prepared, investing in real estate can turn out to be a substantial supplement to your income and be well worth the cost.