Real estate investing can be a great tool to generate additional income for your family; however, can you do it completely passively?
Some investors think real estate investing is a great way to generate passive income, and in some ways, it can be! But it is important that you realize that depending on which investment strategy you choose, investing may not be passive at all.
Some real estate investing strategies can be great ways to generate passive income; however, most of the traditional real estate investing strategies require some level of active participation or involvement within the process.
Whether your investment strategy is fix and flips, short-term rentals, wholesaling, or even buy-and-hold, active participation is required to some extent.
If you are looking for a completely passive real estate investing career, you can achieve this by investing in real estate investment trusts (REITs), real estate funds, and crowdfunding sources. All three of these investment strategies offer a completely passive approach to real estate investing, but there are some things you should consider before using these strategies.
Real Estate Investment Trusts (REITs)
What is a REIT?
REITs are companies, corporations, or trusts that invest in income-producing commercial or residential real estate. REITs tend to get confused with stocks because they are very similar in their ability to be publicly traded and generate income for their investors through dividends.
This passive real estate investing strategy will allow its investors to combine capital to purchase and maintain a piece of real estate. All the investors who partake will benefit by collecting dividends from the company and greater portfolio diversity with minimum involvement.
Investing in REITs is truly a great strategy if you want to own a piece of real estate but don't want to deal with the headache of being a landlord. When you are buying into a REIT, it is very similar to buying into a stock. Like investing in stocks, your return for a REIT will solely depend on the performance of the companies you bought into and the general real estate market.
Investing in REITs is very attractive to the average investor because it doesn’t require a large investment to start reaping the rewards of owning real estate. REITs can be purchased in partial shares through an exchange-traded fund (ETF), making owning real estate passively even more affordable to the average investor.
ETFs will be discussed in more detail later in the real estate fund section.
What are the different types of REITs?
Investors usually break REITs into two categories Mortgage REITs and Equity REITs.
A Mortgage REIT generates income by the interest earned from investing in either a residential or commercial mortgage. The biggest downfall with mortgage REITs is that mortgage interest rates will fluctuate with the economy, affecting the mortgage REIT’s performance.
So if mortgage interest rates are very high, you will likely generate a better return from the investment.
An Equity REIT generates income by collecting rental income by properties that the company or corporation owns. A portion of that rental income is then dispersed among investors within the REIT as dividend income. The properties within the REIT are usually held for the long-term and can be in a variety of industries.
Below are a few of the industries that have available REITs publicly traded on the stock exchange.
Data Centers REITs
Real Estate Funds
What is a Real Estate Fund?
Real estate funds can be either actively or passively managed and still serve as a passive investment for] investors.
Similar to how REITs are like stocks, real estate funds are like mutual funds. Investors choosing to invest in real estate funds receive a return based on the assets' appreciation and not dividends income.
A real estate fund is unique because it can invest in various REITs while also directly purchasing and owning residential and commercial properties. In fact, there are two distinct ways to be a part of a real estate fund.
Real estate funds can be split into two categories: Public Real Estate Funds and Private Real Estate Funds.
Public Real Estate Funds
Public real estate funds are real estate exchange-traded funds (ETFs) and real estate mutual funds containing real estate securities traded in the stock market.
Real estate exchange-traded funds allow the investor to own a share or partial share of a real estate corporation or REIT. Investing in REITs using ETFs can be a great way to start if you don’t have much capital because they often cost a few hundred dollars for your initial investment.
For real estate mutual funds, the investor can either have an individual or entity actively or passively managing the mutual fund. Regardless of how the fund is managed, the amount of work done by the investor is the same. However, if you decide to go with an actively managed fund, there will be additional fees to pay the active managers.
The makeup of both ETFs and real estate mutual funds are very similar; however, with actively managed real estate mutual funds, you won’t have any control over the REITs or real estate the fund decides to purchase or sells.
Passively managed mutual funds tend to take a long-term approach to investing with minimum selling and buying securities along the way.
Private Real Estate Funds
Private real estate funds are professionally managed by a manager or group of managers. With this type of investment fund, professional managers pool together investor’s capital to actively purchase and maintain residential and commercial real estate.
Many famous real estate moguls, such as Grant Cardone, have private real estate funds that allow other accredited investors to invest. Depending on the fund you decide to invest in will determine whether you are paid in dividends from the rental income like REITs or the asset’s appreciation like mutual funds.
One of the biggest drawbacks to private funds is that many restrictions prevent the average investor from partaking. It is very typical that private real estate investment funds only accept capital from accredited high net worth investors per the U.S. Security and Exchange Commission (SEC) guidelines. Not only do you have to be an accredited investor, but most of the entry fees for these funds require a significant minimum investment to invest with them.
What is Crowdfunding?
Crowdfunding allows a group of investors to contribute capital together so that an entity can purchase a real estate deal. Crowdfunding is very similar to having real estate funds, but the biggest difference is that all of the crowdfunding raises its capital completely online.
The passive investment strategy allows for a group of investors to have greater buying power within a given area, similar to real estate funds.
Over the years, crowdfunding has become very popular with the use of social media. Crowdfunding managers can easily reach potential investors worldwide who may want to invest with them.
There are many online platforms that will allow investors to participate in crowdfunding deals. These platforms have their own requirements to be a crowdfunding investor, and it is best to go to do your research when attempting to choose a platform.
Below are a few crowdfunding platforms to start your passive investing journey
*Must be an accredited investor to invest with the platform.
In summary, you can passively invest in real estate, but you must know which strategy best fits your wants and needs.
Suppose you like having the ability to purchase real estate from your phone or computer using brokerages like Vanguard, RobinHood, or Fidelity. In that case, you should consider investing in REITs, real estate ETFs, or real estate mutual funds.
If you want a more hands-on approach and want to physically network with active investors and fund managers, seeking out a private real estate fund may just be the best choice for you.
Lastly, if you want some aspects of control over your investments and would like to invest from a click of a button, then finding the right crowdfunding source like Fundrise or DiversityFund will be able to satisfy all of your needs.