What is Passive Real Estate Investing?
Nov 21, 2022
Passive income refers to any income stream that doesn't require regular, hands-on management. In other words, you can make recurring money without having to put in a significant amount of work, energy or time.
The most common form of passive investing is the stock market. You buy a stock and then afterwards, do nothing more. Of course, there's the initial investment in the stock, plus some initial research. But after that, investing in equities (stocks) is very much "hands-off."
Passive real estate investing is accomplished when you buy real property or proportional shares of a real estate asset in exchange for a recurring income stream. Generally, passive real estate investing does not require you to engage directly with a property. In fact, in some scenarios the investor never actually views the property in person.
How to invest in real estate for passive income
1. Buy fractional shares of real estate
There are a variety of fantastic startups and real estate investment apps that connect real estate syndicates to investors who want to own real estate. Rather than buying entire properties, investors can buy fractional shares of one or more properties. Investors hope to receive monthly, quarterly or annual income distributions in exchange for taking on a portion of the acquisition cost and management fees. Like many real estate investments, fractional shares are mostly illiquid. You can still sell your shares, but it's not as easy as selling a stock.
Examples of fractional real estate platforms include Fundrise, Arrived and Realty Mogul.
2. Buy REITs
REITs allow you to invest in real estate without owning the physical real estate. A REIT may own various commercial or residential real estate developments - such as office buildings, retail spaces, apartments or warehouse space. REITs tend to pay high dividends, which makes them a common investment in retirement.
One advantage of REITs is that you can gain exposure to multiple sectors, which might provide great diversification. For example, you could invest specifically in multi-family REITs, commercial REITs, single family housing REITs or all of the above.
2. Buy a rental property
While not entirely passive, investing in a rental property is typically not difficult after the acquisition is complete. In other words, the ongoing management can be outsourced to a property manager which makes rental properties somewhat passive.
Rental properties have the potential to appreciate over time and your tenant will be paying your mortgage for you, which means your equity position will improve over the years. Plus, you can also choose to sell the property at a higher amount than the purchase price and avoid taxes by using a 1031 exchange.
Lastly, the property has an ongoing, monthly return on investment which ensures a positive cash flow. You'll be collecting rent from your tenants every month which will be more than the maintenance cost plus mortgage payment.
Conclusion: Benefits of Passive Income
Passive income is the key to growing generational wealth. The average millionaire has about seven streams of income. Real estate is a relatively safe form of investing and is generally an asset that appreciates over time.