Real estate investors may conjure images of house-flippers or landlords who use their homes to generate income. Don’t let the prospect of active real estate investing deter you if you’re interested in the market but concerned about the time commitment involved.
Unlike “active” investments like house flipping, which need constant monitoring and management, “passive” real estate investments generate income with minimal effort on your part. But what does “passive” mean, and how does real estate investing operate when it uses this strategy?
In this article, you will get to know more about passive real estate investing and the benefits you can enjoy with it.
What Does Passive Real Estate Investing Mean?
An investor in passive real estate doesn’t have to put in a lot of time or energy to keep the property running smoothly. Passive real estate investments can be made in a few different ways. Some examples are REITs (real estate investment trusts), crowdfunding platforms, remote property ownership, and real estate investment funds.
These investments allow you to generate passive income without engaging in manual labor or managing rental properties. Investing in a real estate investment trust (REIT) is one strategy that allows real estate investors to earn investment income without directly owning any real estate.
Investment in Real Estate: Passive vs. Active
Passive real estate investments have a few essential characteristics that set them apart from active ones.
For active real estate investments, the investor often takes on the role of both landlord and property manager. In fact, passive investors rarely, if ever, visit the properties in which they have invested.
Active real estate investments come with greater responsibility. Among these are handling lease agreements and fixing up the property. On the other hand, You won’t have as much say over your money with passive real estate investments, and you might not get the same tax benefits, but getting started is easier and you won’t need much experience. Additionally, the liquidity of these investments is typically higher than that of active real estate investments.
Benefits You Can Reap From Passive Real Estate Investment
Passive investing is a terrific way to save for the future and earn some extra money. Let’s take a look at what benefits to expect from passive real estate investing to get you started-
You’ll Save Time and Stress
With passive investing, you may avoid the hassles of dealing with tenants, vacancies, and maintenance. By delegating the day-to-day management of your investment to qualified professionals, you can rest easy knowing that your money and time are in good hands.
Less Capital Required
You don’t need a large sum of money to get started with passive real estate investing. You probably couldn’t afford to buy a whole apartment complex if you were investing actively on your own, but with crowdfunding or a real estate investment trust, you can get started with passive real estate investment.
Diversifies your holdings
Many commercial real estate transactions have prohibitively expensive entry barriers (think $5 million or more). Many times, multiple investors may pool their resources and invest in these opportunities as a group. By pooling your money with other investors, you can spread your risk across more types of investments, more geographies, and longer investment horizons.
Purchasing Power Increases through Leverage
Increasing your purchasing power and portfolio diversification are two of the greatest advantages of investing in commercial real estate. The risk of losing everything on a single endeavor also gets decreased.
The term ‘leverage’ refers to the practice of financing investment through debt. When investing in commercial real estate as a passive party, you and other investors can pool your resources to acquire a larger, more secure asset than any of you could individually. You might not have to act as a guarantee of the debt depending on the sort of investment you make. That means you’ll only ever lose what you put in.
No Need for In-Depth Understanding
Similarly, you don’t need a lot of experience to start investing passively in real estate. If you don’t feel confident in your property management skills, you may want to consider investing in a real estate investment trust (REIT) or a real estate fund.
Helps Avoid Liability and Credit Card Risks
One can avoid taking on credit or liability risk by investing passively. You can avoid the responsibility that typically comes with owning real estate and also avoid personally guaranteeing multi-million dollar loans.
Helps the Funds to Flow
When executed properly, passive real estate investing can generate a steady flow of income for decades. Consistent payouts from any investment are welcome, but they become much more so when you have little to no involvement in managing the investment.
Ensures Multiple Sources of Income
High rates of return are the goal of many passive real estate investments, and if you invest consistently across a variety of opportunities, you can build a stable source of income that lasts for decades.
Tangibility Offers Stability
Apartment buildings and mobile home parks are two types of commercial real estate that are relatively solid investments. Other types of commercial real estate include office buildings and retail stores. Due to these reasons, commercial real estate tends to be less volatile and less subject to the ups and downs of the stock market.
One of the most appealing parts of investing in commercial real estate is the possibility of amassing passive income from your investments that exceed what you make in your day job. You invest your funds and they begin to generate income for you.
Because renters will pay down your mortgage while the property appreciates in value, and because you may justifiably hire a property management agency to handle the day-to-day operations, commercial real estate is the perfect vehicle for increasing that revenue stream. Rest easy as you direct the management and keep collecting the money.
Invest wisely, and you can earn money even as you relax. While you snooze, you can earn money. In addition to helping you reach financial independence, passive income is taxed at a considerably more manageable rate of up to 20% of income, while conventional income is taxed at up to 37%. So, you can see how beneficial passive real estate investing is, and how you can comfortably keep earning money with this if you decide to go for it.