Investors who feel that the real estate market might be a successful investment vehicle—especially those who do not intend to be directly engaged in the day-to-day operational tasks—connected with managing real estate holdings, may be attracted to passive real estate investing.
This is understandable given that real estate investing, despite the possibility of significant returns and benefits, requires hands-on work and careful management.
Passive activities are appealing to many real estate investors. Yet, only a small percentage of people are fully aware of what it involves and whether this type of investment is ideal for them.
Here are some things you need to know about passive real estate investing and its different forms.
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Investing passively refers to holding diversified assets in a portfolio over the long term and allows investors to have less involvement than active investing.
A common investment strategy for this approach is to buy and hold exchange-traded funds (ETFs) with diverse assets over time. In general, passive investors don't seek to be aggressive in seeking out market opportunities but rather to benefit from possible long-term gains.
Adding to what has already been said, passive real estate investing features a more hands-off tactic for investing in the market. This does not necessarily include investing money in a fund or asset and paying no attention to how it is performing, but it does impose less work than actively managing real estate assets.
An excellent illustration of active management in real estate is purchasing commercial properties or apartment buildings and closely monitoring the rentals, upkeep, and daily tasks required to hold the investment properties thriving.
The forms, levels of involvement, and potential profits of passive real estate deals vary. These could encompass both direct and indirect passive investing.
Direct passive investing entails buying an item of property outright, like a rental unit, and handing over management to a property management company. For instance, the responsibility for finding tenants, handling the rental agreements, and day-to-day management of an apartment complex would fall to real property management.
Alternatively, real estate investors who engage in indirect passive investing are considered limited partners who would generally invest in properties that are jointly owned by a large pool of investors. This means that no individual investor holds exclusive rights to a particular asset.
Comparatively, direct passive investments require more significant financial commitments but give investors more control over their investments. The indirect form of passive real estate investing, on the other hand, can provide access to a higher-end asset class at a lower cost. In exchange, they give up their active role and a majority of control over the asset.
Listed below are common ways of passive real estate investing strategy:
Real estate investment trusts (REITs) are corporations that function as trusts. They make investments in different kinds of asset classes, mainly commercial buildings, and distribute dividends from their investment income to shareholders annually.
Property ownership and rent collection are the main responsibilities of REITs, and in some cases, they may fund mortgages and collect interest as well. Since it is not a particularly risky class of property, they tend not to grow or appreciate as much as other investments.
A specific class of mutual funds called real estate funds invests in publicly traded real estate instruments, which may occasionally include REITs. Compared to these, real estate funds offer a longer investment horizon and create profit through appreciation rather than dividends.
Real estate funds, as opposed to REITs, frequently invest in a variety of properties, not primarily commercial real estate. They are supervised by experts, saving investors the hassle of conducting in-depth due diligence on where to invest their money.
Direct real estate ownership is made possible by Delaware Statutory Trusts (DSTs). Among the types of real estate that can be owned through a DST are industrial, multifamily, self-storage, medical, and retail.
In many cases, these properties are institutional quality, similar to those owned by pension funds and insurance companies.
In addition to overseeing investor reporting and monthly distributions, an asset manager also handles the day-to-day management of the property. In DSTs, capital gains are deferred, but only if the gains are reinvested in other properties.
Remote ownership gives investors a bit more authority over the property while still being seen as a passive investment. It is an excellent option if you want some participation in managing your properties but still don't wish to be a landlord.
By relying on and overseeing an on-site property manager, an investor can own a rental property without taking on the maintenance themselves. The majority of remote investors are out of state and monitor their properties online or via phone.
The benefit of remote investing is that potential investors can generate rental income from areas in high demand regardless of their location. The downside is that you will have to depend on others to manage your day-to-day operations if you don't plan to visit frequently.
Real estate crowdfunding is exactly what it sounds like—it provides a way for investors to pool their capital and invest in a larger project than they could on their own. This approach is typically only used with online platforms. This enables a large number of users to pool funds and indirectly invest in housing loans anywhere in the region.
Real estate crowdfunding is a fantastic way to generate passive income and resembles online marketplaces that let people purchase fractional shares of firm stock in several respects.
For those interested in passive income, REITs, DSTs, funds, and other avenues are all suitable real estate investment options.
There is no absolute superior choice among these investment types. Instead, investors should take into account their personal risk tolerance and annual return goals and pick the real estate strategy that best suits their individual tastes.
Whatever the level of passiveness of your investments, it is important to seek professional advice to ensure you are not overlooking any responsibilities, obligations, or other legal implications.
We at Saint Investment Group are available to provide you with information on various forms of passive real estate investment opportunities that may be beneficial to you.If you want to know how passive real estate investing works, contact us at 949-881-7128 at Saint Investment Group today!
A master in Investment, Marketing, and Capital Raising.
Nic has honed his focus on the Real Estate and debt markets with Saint Investment Group and pursues large-scale Distressed Asset purchases with his partners and syndications.