Real estate investing has a reputation for requiring hard work and a substantial time commitment. But, with careful planning and research, passive real estate investments can be a great option for investors who want to diversify their investment portfolios or simply don’t have the time to act as an active property owner.
In most cases, when someone refers to passive real estate investing, they’re talking about a hands-off approach to owning and managing rental properties or other commercial real estate assets. In this investment structure, a investor provides capital to a professional firm that has the relationships, expertise, resources and time to find, purchase, and manage institutional quality commercial real estate assets. In return, the investor receives periodic distributions from the project.
The most common form of passive real estate investing is a REIT or Real Estate Investment Trust, which is a publicly traded investment vehicle that invests in a diversified portfolio of commercial real estate properties. Another popular form of passive real estate investing is a crowdfunding or private equity deal, which is an investment in which individual investors pool their funds to provide debt or equity to real estate professional operators for the purpose of acquiring and managing a single property or commercial real estate portfolio.
Private equity real estate deals and crowdfunding offerings tend to have lower minimum investment requirements than a REIT or REIT-like product, but can still require a significant time commitment from the investor due to a lengthy process of reviewing offering memorandums, negotiating with sponsors and general partners, and evaluating the property’s potential financial performance. Another type of passive real estate investing is through a deed of trust investment. These investments allow investors to provide cash for a borrower with a recorded deed of trust secured by a mortgage or lien against a property, and typically pay a fixed monthly interest rate while allowing the lender to retain full ownership of the property.
Active Real Estate Investing
For many people, when they hear the term “real estate investing,” they immediately think of buying property, fixing it up, and renting it out. This is called active investing, and it requires a substantial amount of time to learn about a market or property, assemble a team of trusted professionals, secure financing, oversee renovations, and handle day-to-day management tasks like making repairs and collecting rent payments.
Oftentimes, people choose to become active real estate investors in order to enjoy higher returns and greater control over the investment process. This can include buying a single property and acting as a landlord, or purchasing an entire real estate syndication where they own a share of the property alongside other investors and hire a third-party property management company to perform most of the daily operations of the rental. However, many investors who take on this active role may not be ready to shoulder the responsibilities and liabilities of being a landlord or are not prepared for the high level of ongoing involvement and work required in this form of investing.