Passive Real Estate Investing: Is it Right for You?

Consider These Options for Generating Income Through Real Estate Investments

When you think about real estate investing, it’s likely that two things come to mind. First, you might think of those popular television shows where someone buys a property, fixes it up, then sells it for a profit. Second, you probably think of purchasing a rental property and finding and managing tenants. Both of these are examples of active real estate investing, and they’re smart options for some investors. However, they aren’t the only ways to generate income through real estate, so read on to learn about passive real estate investing and whether it may be right for you.

What is Passive Real Estate Investing?

In essence, passive real estate investing is when you supply the money but someone else does all the work on your behalf. If you don’t have the time, know-how, or desire to get involved in active real estate investing, passive real estate investing could be right for you.

Types of Passive Real Estate Investments

Let’s review three of the most common ways you can begin investing in real estate passively:

  • A real estate investment trust (REIT) allows investors to pool their money in order to invest in commercial real estate. REITs generally have a focus, which could be office buildings, apartment complexes, warehouses, and even shopping malls. This kind of passive real estate investing covers just about every type of commercial real estate. REITs are smart investment vehicles for passive real estate investing because the companies are required to pay out at least 90% of their taxable income to shareholders – or face paying corporate income taxes.
  • A related option is to invest in other publicly traded companies doing business in real estate. An example is a land developer, or even a business such as Zillow, which is real-estate adjacent.
  • Here’s one you may not have considered: investing in companies whose primary business is not real estate, and yet they own a great deal of real estate. For example, this could be a retailer with a popular flagship location and many store locations.
  • A growing method of passive real estate investing is crowdfunding. There as several emerging platforms, such as CrowdStreet and RealtyMogul that allow investors to pool their money and invest in a real estate deal together.
  • Finally, you might just take the simple approach of partnering with one or more other investors who want to take on an active role and allow you to remain passive.

In each of these options, you won’t have to handle the day-to-day work involved with acquiring or operating properties. Yet, you can reap the financial benefits.

Advantages of Passive Real Estate Investing

There are several notable reasons to choose passive real estate investing:

  • You don’t need to be a real estate whiz or have experience – you only need to understand the basics of investment analysis.
  • Passive real estate investing typically means a much smaller time commitment than, say, managing a retail property you have purchased.
  • You don’t need a lot of capital to get started. For example, you can purchase just a few shares to get started in a REIT or start small with crowdfunding.
  • Passive real estate investing opens up opportunities you won’t otherwise have to put your money to work. Think about it – you likely can’t purchase a high-rise apartment complex, but you can invest in that asset class through a passive option like a REIT.

Of course, there are advantages to taking a more active approach to real estate investing too – namely, the prospect of higher returns and the ability to call all your own shots. However, you’ll also take on more risk and a greater time commitment.

Is Passive Real Estate Investing Right for You?

As with any investment strategy, there’s no one-size-fits-all approach. As you consider whether passive real estate investing might be the right option for you, look at both the advantages and disadvantages. Consider your investment goals, your risk tolerance, and the time you have available to devote to real estate. All of these factors can help you determine whether passive real estate investing would make a savvy addition to your portfolio.

Illuminated Advisors is the original creator of the content shared herein. I have been granted a license in perpetuity to publish this article on my website’s blog and share its contents on social media platforms. I have no right to distribute the articles, or any other content provided to me, or my Firm, by Illuminated Advisors in a printed or otherwise non-digital format. I am not permitted to use the content provided to me or my firm by Illuminated Advisors in videos, audio publications, or in books of any kind.

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